Husky Energy takes upgrader plunge

Joins long line-up; figures outlook for crude prices and oil sands production outweigh concerns about rising project costs

Gary Park

For Petroleum News

Husky Energy has given a solid vote of confidence to the future of oil prices by starting engineering work on a plan to almost double capacity at its Western Canadian heavy oil upgrader at a possible cost of C$2.3 billion.

After about a decade of mulling over the expansion while infrastructure costs have soared, Husky plans to spend C$90 million on the engineering work over the next 15 to 18 months.

It will then decide whether to embark on full-scale construction.

If the final project is built it should be ready to come on line in 2009, raising output to 150,000 barrels per day from about 82,000 bpd.

“The upgrader will ensure that Husky captures the full value from increasing volumes of heavy oil production,” including Husky’s own Tucker project, said president and chief executive officer John Lau.

The upgrader at Loydminster, on the Alberta-Saskatchewan border, was commissioned in 1992 at a cost of C$1.6 billion and has been steadily increased from its initial capacity of 54,000 bpd, converting heavy oil into low sulfur synthetic crude for refineries in Canada and the United States.

Other Edmonton area upgrader proposals

In addition, Shell Canada is raising capacity at its Edmonton refinery, while France’s Total has given strong indications it may join the line-up.

The reluctance to enter the upgrading sector over recent years has reflected the economic doubts associated with such ventures.

Traditionally, refiners have been faced with the high costs of upgrading a resource that is less valuable than conventional higher crude and have ended up smeared in red ink.

Although the higher returns from fast-rising volumes of bitumen have eased the risks, the price differential between light and heavy crudes has grown to more than 50 percent from the long-term spread of 30 percent, which means heavy oil producers are now collecting only about US$30 per barrel.

Tom Ebbern, executive managing director of institutional research at Tristone Capital, said oil prices would have to fall below US$40 per barrel for Husky to back away from the upgrader.

However, he did suggest that Husky’s procrastination means it now has to swallow the higher costs of steel and labor.

Husky has been helped along by its own C$500 million Tucker oil sands project, which is scheduled to produce its first oil by late 2006 and grow to peak production by mid- to late-2008.

As well, Husky has its sights on a C$10 billion oil sands investment, targeting 200,000 bpd of bitumen, starting with a 50,000 bpd phase in 2009.

Costs also up for North West

Company President Rob Pearce said costs of the three-stage 231,000 barrel per day operation have “gone up significantly” from original estimates of C$4.8 billion.

He said the initial figures were developed 18 months ago, since when costs of materials, equipment and labor have galloped ahead.

North West is hopeful it can curb that escalation by building near Edmonton rather than in the heart of the over-heated Fort McMurray oil sands region, although the same squeeze on everything from workers to steel applies.

But builders of five other upgrader complexes share North West’s view that Edmonton’s larger workforce and its proximity to infrastructure, plus the city’s role as a hub of existing and planned pipelines both from the oil sands and to U.S. and Canadian markets, provide an added edge.

BA Energy, a privately held company like North West, shares the view that Edmonton is the preferred location and is confident it has the jump on its rivals, targeting a start-up date in 2008.

Now both BA and North West are on the verge of testing the support for their plans by becoming publicly traded companies.

BA anticipates an initial public offering by late 2006 and North West said it is likely to go public in mid-2007, pinning their hopes on investor appetite for any venture related to the oil sands.