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Kyoto — oil sands curse or myth? Koch affiliate shelves project, others waver, some give vote of confidence to sector; government scoffs at doom-and-gloom warnings, industry still uneasy Gary Park PNA Canadian Correspondent
An affiliate of Koch Industries Inc., the privately held U.S. energy giant, pulled the plug on a C$3.5 billion Alberta oil sands venture, insisting the Kyoto Protocol was the straw that broke the project’s back.
A possible C$8 billion project by Canadian Natural Resources Ltd. hangs in the balance as Canada’s third largest petroleum producer seeks clarity from the Canadian government before making a milestone decision this month on whether it can afford the added costs of complying with Kyoto.
French energy powerhouse TotalFinaElf SA exercised an option and took a 43.5 percent stake in a C$1 billion venture being spearheaded by ConocoPhillips Canada Ltd., effectively saying Kyoto was merely the cost of doing business.
Pioneer oil sands producer Suncor Energy Inc. calculated its exposure to Kyoto, assuming production of 500,000 barrels per day and a federal government cap on the price of carbon credits, would be just 20 cents to 27 cents per barrel.
Nexen Inc. has decided to spend C$155 million this year advancing plans for its C$2.5 billion joint-venture with OPTI Canada Inc., barely a month after warning that it was ready to stall the 70,000-barrel-per-day undertaking because of its Kyoto worries.
Western Oil Sands Inc., a 20 percent partner in Shell Canada Ltd.’s recently launched C$5.2 billion Athabasca project announced it hopes to raise C$50 million in an offering of common shares to fund its stake in the development of a 1.7-billion-barrel lease.
Murphy Oil Corp. plans to spend more than US$80 million this year as part of its 5 percent share of the Syncrude consortium.
This welter of announcements occurred in the just first two weeks of 2003, generating equally varied responses.
Opinions still divided Wilf Gobert, an analyst with Peters & Co. in Calgary, said Suncor’s decision to boost capital spending by C$100 million this year to C$1.05 billion on the basis of its Kyoto calculations had downgraded the climate-change treaty as a scare factor for the stock market by indicating that it was almost a return to “business as usual.”
Canada’s Environment Minister David Anderson delivered an acerbic message to those who have warned of economic devastation from Kyoto. “The dagger of truth has sort of burst the bladder of misinformation,” he said.
Robert Hornung, policy director with the Pembina Institute for Appropriate Development, an environmental think-tank, said “all of the scenarios of economic Armageddon are now a fantasy.”
But leaders of the Canadian Association of Petroleum Producers and the Canadian Manufacturers & Exporters Association said that until more detailed cost analyses are completed and more is known about how Kyoto will be implemented it is too early to dismiss the worries.
Huge oil sands reserves The importance of the oil sands, which contain more than 300 billion barrels of recoverable reserves and are viewed as a critical component in North America’s energy security equation, was again underscored in a new report by Calgary-based investment firm FirstEnergy Capital Corp.
It projected that Canada’s total oil output will reach 2.5 million barrels per day in the third quarter, with synthetic crude and bitumen surpassing 1 million barrels per day for the first time, moving Canada to 9th spot on the global producers’ list.
In case the potential of the oil sands hasn’t registered, FirstEnergy projected that the sector could attain 4 million barrels per day and hold that level for 75 years.
Other analysts believe the oil sands can remain economic so long as crude prices don’t fall below US$16-$18 per barrel.
The Paris-based International Energy Agency has estimated that over the next 28 years the oil sands deposits of Canada and Venezuela could attain 10 million barrels per day, or 8 percent of world production, a trend which could be accelerated if crude prices remain in the US$28-$30 per barrel range.
Kyoto a jolt But there is little doubt that Kyoto jolted the established and would-be operators in northeastern Alberta and continues to hang over their heads, especially those trying to attract partners and financial backing for greenfield projects.
When there was talk that Kyoto would add C$1.50 per barrel to operating costs at the Fort Hills project, 78 percent owner TrueNorth Energy Inc. (a one-step removed unit of Koch), which had already boosted the capital budget by C$1 billion to C$3.5 billion to cover revised labor and materials costs, said those added costs could cripple plans for its 190,000-barrel-per-day proposal.
Other oil sands players such as EnCana Corp, Petro-Canada, Nexen and Canadian Natural reinforced those concerns.
TrueNorth, startling its 22 percent minority partner UTS Energy Corp. in the process, then slashed its fourth quarter 2001 and 2003 capital spending, blaming Kyoto uncertainties and its inability to attract a third partner.
The picture changed dramatically in December when Natural Resources Minister Herb Dhaliwal pledged the Canadian government would cap the cost to industry of reducing greenhouse gases at C$15 per metric tonne of carbon dioxide and limit the expected reduction from the oil and gas sector at 15 percent below the projected “business-as-usual” outlook for 2010.
TrueNorth shelves project That wasn’t enough to prevent a Jan. 14 announcement by TrueNorth that it was shelving Fort Hills after investing C$120 million on drilling, engineering and regulatory procedures and identifying recoverable reserves of 2.8 billion barrels.
“We still consider Alberta’s oil sands to be a major part of North America’s energy future,” said TrueNorth board chairman Dave Robertson, insisting his company intends to “preserve the value of the assets,” while waiting for a chance to re-evaluate the project.
Tom Ebbern an analyst with Tristone Capital Advisors LLC, told Petroleum News Alaska he doubted a revival would occur inside three or four years, although “we could see it come to light again” if oil sands technology makes significant advances.
He also argued that Kyoto was likely not among TrueNorth’s top seven reasons for shelving its plans.
The view among analysts, including Ebbern, was that Fort Hills’ search for a partner, aided by financial services firm Morgan Stanley, was probably hurt by its decision to build a pure mining operation with no upgrading facility at the site.
It intended to ship the raw bitumen by pipeline to Koch’s major refinery at St. Paul, Minn., for conversion into petroleum products for the U.S. market.
Lurking around the edge was a feeling within the financial community that prospective partners might have been deterred by the unknowns of dealing with privately held Koch.
TrueNorth’s decision to bow out served as reminder that not all oil sands projects are cut from the same cloth.
It would have joined Suncor, Shell Canada and Syncrude Canada Ltd. as the fourth pure mining operation in Alberta, using an open pit mine to strip away the bitumen deposits.
The newer generation of operators — EnCana Corp., Petro-Canada, Nexen and ConocoPhillips Canada — are turning to steam-assisted gravity drainage to force deeply buried deposits to the surface, a technology that could carry higher costs under Kyoto than mining.
But the loss of TrueNorth is not an unmitigated setback for northeastern Alberta, where 67 projects variously estimated to be worth C$63 billion to C$80 billion are on the drawing board.
For Bill Almdal, executive director of the Athabasca Regional Issues Working Group, the breathing room will enable the oil sands “capital” of Fort McMurray to deal with some of the social and physical challenges in a rapidly-growing city of close to 45,000 which has been stretched to provide skilled construction workers for the mega-projects and to provide housing for the workers.
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