Synenco accessing Asian answers

Canadian company turns to Chinese partner in search for cost-cutting solutions, but faces opposition; plan includes shipping to Arctic

Gary Park

For Petroleum News

Oil sands startup Synenco Energy is ready to exploit its Asian connections to ship prefabricated modules for its Northern Lights project across the Pacific into the Arctic Ocean, then by barge along Canada’s northern river system.

It’s an unparalleled strategy to fend off soaring labor and materials costs in the oil sands that is already attracting the ire of organized labor.

But Synenco and its 40 percent partner, SinoCanada Petroleum (a wholly owned subsidiary of China’s Sinopec), estimate it can slash their latest estimated upstream capital costs from C$5.6 billion to C $4.4 billion, or C$49,170 per daily barrel of production to C$38,532.

The approach is “going to be different from other oil sands developers, but it’s one we think is best for our company,” said Synenco President and Chief Operating Officer Todd Newton.

“Our approach should provide relief from the current cost environment (in Alberta) while recruiting the vast capabilities of our partner.”

He noted that Sinopec is a “functionally integrated construction group,” with access to the full array of engineering, technical, fabrication, construction and procurement expertise.

Modules will weigh up to 2,000 tons

They would then be shipped across the Pacific and into the Arctic Ocean for transfer to barges, which would take about 24 days on the Mackenzie, Slave and Athabasca rivers, as well as crossing Great Slave Lake and Lake Athabasca, to reach the Northern Lights site in northeastern Alberta.

If components were manufactured in the Edmonton area they would face weight limits on the highway of 175 tons.

The river route got a fresh workout last summer when Northern Transportation Co. operated a tugboat and barge to Fort McMurray in Alberta — the first such voyage since 1979.

The results have convinced Northern Transportation (a partnership of Inuvialuit and Inuit aboriginal enterprises) the Synenco idea is feasible, although no contracts have yet been signed.

Synenco has hired AMMOET, a logistics firm, to coordinate the transportation plan.

Plan faces opposition from unions

But the toughest opposition is likely to come from the Alberta Building Trades Council, representing 16 unions and 50,000 workers.

Synenco has said its Asian solution will shrink the on-site construction workforce to about 900 from 2,000.

Building trades Chairman Richard Wassill told the Edmonton Journal that Albertans should be concerned about the prospect of seeing jobs exported as much as the current export of bitumen to upgraders and refineries in the United States.

He suggested Alberta’s new premier Ed Stelmach, who wants measures taken to keep more of the value-added conversion of bitumen into synthetic crude in Alberta, is likely to hear from the unions along with industrial suppliers, fabricators and truckers.

Newton said Northern Lights will still have a tough job recruiting 900 workers and has not ruled out going overseas to accomplish that task.

He also emphasized that it is much easier to negotiate fixed-price contracts in Asia than it is in Alberta.

Responding to the anticipated criticism, Newton said Northern Lights will generate major benefits for Alberta by creating 1,100 jobs once it comes on stream at an expected 100,000 barrels per day in 2010 — a peak that is projected to last 30 years.

Payout sooner, so royalties go to 25% sooner

Reflecting the inflationary pressures on the oil sands, the project at one time was estimated to cost C$1.7 billion for the mining and extraction facilities.

But Synenco noted that approximate capital costs per barrel of production have surged from C$100 per barrel in 2003 at Shell Canada’s Athabasca project to C$200 for Syncrude Canada’s third-phase expansion completed this year, to C$225 for the Long Lake joint venture by Nexen and OPTI Canada and, most recently, something in the range of C$350 at Shell’s Athabasca expansion of 100,000 bpd scheduled to start operations in 2010.

However, Synenco cautioned that its latest upstream forecast is based on constant 2006 dollars and could still miss the mark by as much as 30 percent on the high side and 10 percent on the low end.

The lease holds 1.67 billion barrels of bitumen in place, an increase of 180 million barrels following drilling last winter. The recoverable resource is estimated at 1.3 billion barrels.

The project also includes plans for an upgrader in the Edmonton area, but an update of the budgeted C$3.6 billion for that job won’t be released until 2007. The use of Asian manufacturers is also being considered for that portion.

Face-to-face with a pledge

That would suggest he is not prone to superstitious leanings.

But he won’t have much time to revel in his stunning leadership victory.

No sooner was he in office, than he collided head-on with one of his key election pledges.

Stelmach gave priority to protecting the jobs of Albertans in the oil sands by decrying the loss of high-end employment from the export of raw bitumen for upgrading to synthetic crude in the United States. Just a day after his victory on Dec. 3, he conceded that stopping the shipments is unrealistic, but he plans to take whatever steps are within his government’s power to keep more of the upgrading within the province.

What he likely didn’t count on was the loss of oil sands’ manufacturing jobs to Asia if Synenco Energy and its Chinese partner Sinopec to fabricate components of its upstream and downstream facilities in Asia — a loss of 900 construction jobs at the upstream end alone.

Stelmach has yet to spell out in detail what he can do to keep the upgrading and the manufacturing jobs in Alberta.

But his political opponents have wasted no time pouncing on the issue.

Hugh MacDonald, energy spokesman for the Liberal party, said that Synenco’s plan to “do everything offshore is a total sellout of this province.”

New Democratic leader Brian Mason said Synenco’s drastic measures to avoid cost inflation and labor shortages in Alberta should trigger a sweeping review of oil sands development.

The job facing Stelmach is to tackle the question of whether Alberta is getting value from its own resources, given the indications that the province is being shouldered aside in the extraction and processing of bitumen.

During the leadership campaign, Stelmach, speaking from his experience as a farmer, said that giving U.S. companies a free pass to process bitumen was like “scraping off the topsoil, selling it, and thinking we have a rich farm because we have cash in the bank.”

He suggested economic incentives might be needed, rather than financial penalties or inflexible rules, to keep the upgrading at home.

“I know we can’t add value to every ton of bitumen, but we can improve,” he said Dec. 4.

MacDonald favors a tougher line, requiring oil sands developers to hire aboriginal, local, provincial and Canadian companies for their construction and procurement work.

Unless action is taken, the Synenco move could put the Alberta steel fabrication industry “in the trench,” he said.

Others, including Andre Plourde, a University of Alberta energy economist, said the Synenco decision was probably inevitable to arrest spiraling costs.

He cautioned that any moves to curb costs, such as slowing the pace of oil sands development, would only cause investment uncertainty and damage Alberta’s carefully crafted reputation as a good place to do business.

—Gary Park