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Suncor/Total’s joint-misadventure? Partnership kills upgrader project and faces challenges with two oil sands mines because of saturated North American oil market Gary Park For Petroleum News
When oil sands giant Suncor Energy and France’s Total formed their joint venture in late 2010 there was renewed hope of capital spending totalling about C$27 billion to proceed with the 200,000 barrels per day Voyageur upgrader, the 100,000 bpd Joslyn oil sands mine and the 160,000 bpd Fort Hills mine.
So far this year, Voyageur has toppled, Joslyn is wobbling and Fort Hills is uncertain.
Voyageur, always in the high-risk category of upgraders and refineries, was mothballed in March because of changed market conditions that have swamped North American markets with unconventional oil.
The message to the industry was unmistakable: Nothing is sure even for companies with very deep pockets and thick skin.
FirstEnergy Capital analyst Mike Dunn said the final decision was more of a formality after a string of warnings over a year and despite spending of C$2 billion to C$3 billion on construction.
When the partnership was finalized with a C$1.75 billion payment from Total, the objective was to bring Voyageur and Fort Hills on stream in 2016, with Joslyn to follow.
That was before the rogue wave of light oil swept in and stole Voyageur’s market when Suncor could not match the prices for upgraded bitumen.
Suncor Chief Executive Officer Steve Williams said the significant change in market conditions challenged the economics of Voyageur and a “thorough review of the project” made it clear that the project couldn’t “meet our criteria for long-term, profitable growth.”
Now a similar refrain is developing around Joslyn, with Williams conceding that the project is “at a minimum moving backwards.”
He said the earliest Joslyn could be sanctioned is 2017, delaying first oil to 2021-2022, and “that’s the best case” he told analysts, suggesting they should “move it back significantly in your models.”
Williams said that while Joslyn has access to a quality bitumen resource, it is not as attractive as Fort Hills, which could be presented to the project co-owners for sanctioning late this year.
“Fort Hills is the next-best industry mine. If you look at the quality of the oil and the size of the reserve, it’s a 50-year project,” he said.
Markets getting saturated Many outsiders are taking a less sanguine view of the project, with Judith Dwarkin, director of energy research at ITG, asking where increased production from Alberta will be sold.
“Producers from Western Canada have saturated the markets that make the most commercial sense and that they have the best access to.
“In order to place the new barrels it costs more to get there and, in the short term, there is no way to do that except maybe by rail.
“Also, when they arrive, they are competing with new barrels being produced in the U.S. The continent is becoming saturated with oil supply and that is why there are so many different initiatives to get Canadian oil off the continent,” Dwarkin said.
Compounding the challenges in Alberta are high construction costs and a scarcity of skilled workers, both ingredients for cost overruns.
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