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Rising costs force rethinking Oil sands spending plans being slashed as challenges accumulate Gary Park Petroleum News Calgary Correspondent
Beset by an array of problems, Alberta oil sands players are now immersed in some deep soul-searching that is sharply reducing spending over the next four years and denting hopes that the 180-billion-barrel reserve is North America’s ace in the energy security hole.
Against a background of breathtaking budget over-runs on new projects and expansions, and continuing unease about the costs of Canada’s decision to implement the Kyoto Protocol on climate change, the oil sands sector also finds itself grappling with other challenges that could have a profound impact on long-term plans.
The Athabasca Oil Sands Developers, an industry planning group and enthusiastic promoter of the resource, has scaled back its overall spending estimates through 2006 to C$25.2 billion (US$17.6 billion) from C$33.3 billion (US$23.3 billion).
Even so, the group remains optimistic that synthetic crude and bitumen production will surpass 1 million barrels per day by 2011, about half of Canada’s total oil volumes. Growing anxieties But there is little attempt by companies to camouflage their growing anxieties.
The list includes:
• Competition for labor and materials as too many new projects jostle for a place in the line-up, sowing the seeds of runaway costs.
• A heavy reliance on natural gas as part of the oil sands processing phase, leaving producers exposed to wild commodity price swings.
• Pressure from environmentalists and within the Alberta government to start charging the oil and gas industry for fresh water. Nearly half of Alberta’s oil production of 1.5 million barrels per day comes from oil recovery using fresh water.
• The challenge to build new pipelines to markets when some are predicting a capacity shortfall of about 1 million barrels per day by 2006.
• A National Energy Board warning that supplies of condensate, or diluent, used to aid the flow of bitumen through pipelines face a shortfall by 2004 on top of a 41 percent rise in condensate prices last year. Industry has been world leader Oil sands producers have led the world over several decades in finding new ways to extract the raw bitumen, reduce production costs and improve product quality and researchers are in hot pursuit of new technologies to improve the economics.
While they hope for ground-breaking developments, the operators are increasingly taking a time-out to re-think their strategies and projects.
The watershed was the Athabasca Oil Sands Project — the third mega-scheme in northeastern Alberta after Suncor Energy and Syncrude Canada — which came on stream this year at a cost of C$5.7 billion (US$4 billion) to the partners Shell Canada, Chevron Canada and Western Oil Sands, or 50 percent above initial estimates.
But the most startling development occurred April 29 when Petro-Canada chief executive officer Ron Brenneman put almost C$6 billion worth of oil sands-related spending on hold.
He said this year’s engineering budget for a C$4 billion-$5 billion refinery conversion will be cut by two-thirds to C$60 million while the integrated company explores options “that are more economic.”
In the process, Petro-Canada, as 75 percent operator, will decide whether and how to proceed with development of its C$800 million Meadow Creek project in partnership with Nexen. The plans filed with regulators in late 2001 propose coming on stream in 2007 and producing 80,000 barrels per day over 25 years.
Brenneman said “alarm bells” have gone off in just the last month as estimates for large items of refinery equipment and interconnecting pipe started to soar beyond the 30 percent-50 percent budget hikes that have plagued Shell, Suncor and Syncrude. Possible cost-cutting measures He said cost cutting could be achieved by reducing the size of the refinery, changing technology or teaming up with another oil sands operator.
The plans include a two-phase conversion of Petro-Canada’s Edmonton-area refinery to produce low-sulfur gasoline and replace its 80,000 barrels per day of light crude feedstock with 85,000 barrels per day of bitumen initially, then doubling that capacity at a later date.
For Meadow Creek, development could be postponed or the venture could be built in two stages, Brenneman said.
He echoed the concern of others that moving too much raw bitumen from northern Alberta could saturate the market.
This year alone has seen TrueNorth Energy cancel a C$3.3 billion project, blaming the unknowns of Kyoto, and Canadian Natural Resources stall progress on its C$8 billion Horizon project, while it considers moving the C$3 billion upgrader portion to the United States to bypass Kyoto.
Real Doucet, Canadian Natural’s senior vice president of oil sands, said May 1 that the company’s board of directors will not make a decision until summer 2004 once it has completed talks with the Canadian government on the long-term implications of Kyoto.
“We have been seeking government understanding in principle that our project remain competitive for 40 years,” he said.
No government commitment to implementation beyond 2012 To date, the government has offered no commitments on an implementation plan beyond 2012, which has prompted organizations such as the Conference Board of Canada to demand immediate action on establishing a long-term strategy.
The uncertainties pose problems for all of those engaged in planning large-scale ventures, but companies such as Imperial Oil and Husky Energy, which last year swapped oil sands interests in the Kearl Lake area, are undaunted.
As Imperial works towards the ultimate goal of 180,000 barrels per day at its Cold Lake leases, which has been developed on time and budget, it is shifting its focus to Kearl Lake, where Chairman and President Tim Hearn said the reserves could yield 200,000 barrels per day over 70 years.
He said Imperial, 69.6 percent owned by ExxonMobil, will continue to evaluate the Kearl Lake property, while boosting its share of Syncrude production over the next seven years to 140,000 barrels per day from 90,000 barrels.
Husky, 73 percent owned by Hong Kong billionaire Li Ka-shing, has also avoided cost overruns on recent oil sands projects and will use that experience to develop its other leases in relatively small phases, said President John Lau.
He said it will start with a C$350 million Tucker project, due to come on stream in 2006 at 30,000 barrels per day before developing its 2.25 billion barrel Kearl Lake lease in three stages to 100,000 barrels per day by 2010.
Lau said phased development offers the advantage of generating cash flow to help fund subsequent stages, insisting: “We can control costs. We see the oil sands as a long-term opportunity for Canada.”
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