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Petro-Canada takes leaner route with a phased strategy Following lengthy reviews, company spurns ‘bigger is better’ approach Gary Park Petroleum News Calgary correspondent
Having spurned the “bigger is better” approach that has ruled development of northern Alberta’s oil sands, Petro-Canada is setting a new course.
Following a seven-month review of its strategy, Petro-Canada has opted for a phased, “bite-sized” strategy and an alliance with Suncor Energy that immediately slashes its own investment in a refining project and slows the pace of its upstream ventures.
For starters, the Canadian integrated company will spend C$1.2 billion to upgrade its 135,000 barrel-per-day Edmonton-area refinery to exclusively handle bitumen and synthetic crude by 2008, displacing 85,000 bpd of conventional sweet and sour crude from Western Canada’s declining basin.
In the process, it has struck a deal with oil sands pioneer Suncor to process 27,000 bpd of bitumen from Petro-Canada’s MacKay River oil sands facility.
That production will be converted into 22,000 bpd of sour crude and added to 26,000 bpd of sour crude from Suncor for refining to gasoline and diesel at the Edmonton refinery. The agreement takes effect in 2008 and extends over 10 years. Back to the drawing board on other development At the same time, it is going back to the drawing board on the development of its three other oil sands leases, which included a possible C$800 million plan for a Meadow Creek project which could have come on stream in 2007 at 80,000 bpd (60,000 bpd net).
Chief Executive Officer Ron Brenneman said Meadow Creek may now be scaled back to 30,000-40,000 bpd by the end of the decade, depending on results of delineation drilling over the winter that will determine where the company locates its next in-situ project.
Overall, the new strategy frees Petro-Canada from plunging into a much grander program that could have been a victim of ballooning costs in the oil sands, pushing its budget for refinery upgrading and Meadow Creek as high as C$5.8 billion.
Brenneman said the “new phased approach” enables Petro-Canada to avoid the trap of a “bigger is better” strategy that has dominated oil sands thinking.
During the review period “we quickly learned size could drive economics the wrong way,” he said.
Slowing the scope and pace of its oil sands program will also give Petro-Canada time to improve and learn from its year-old MacKay River operation, which is currently producing 20,000 bpd, and assess emerging technology options that are aimed at lowering energy costs. Analysts positive on change Among analysts, Wilf Gobert with Peters & Co said Petro-Canada has figured out a way to avoid “production growth at any cost,” while Martin Molyneaux, with FirstEnergy Capital said he could see no downside for either Petro-Canada or Suncor.
Deutsche Bank Securities analysts described the revamped plan as “a more affordable, but smaller scale and longer-term approach to oil sands integration.”
Friedman, Billings, Ramsey & Co. said the only major risk is the potential of a tight labor market in an overheated oil sands sector delaying the development of Suncor’s planned upgrader to handle the new output by 2008.
Brenneman emphasized that the oil sands remain an “obvious growth area” for the company because of its excellent lease position.
What Petro-Canada has set as a priority is seeking an integrated solution to “mitigate market risk and capture value along the chain.”
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