A ‘really big shoe’ drops

Fort Hills heads downhill in chaotic financial market; Petro-Canada scrapping deals

Gary Park

For Petroleum News

To no one’s surprise, the Alberta oil sands have been hit with a thump, as the Petro-Canada led Fort Hills project has been sidetracked, putting at least C$23.8 billion worth of investment in limbo.

It’s easily the biggest shoe to drop in a once-booming sector, where the sky seemed to be the limit just a few months ago.

The partners — Petro-Canada 60 percent and UTS Energy and mining giant Teck each with a 20 percent working interest — have put an indefinite hold on plans for a C$10 billion upgrader and stalled an investment decision on the mining portion until well into 2009, with no promises on when the update will be completed.

The stunning aspect of the decision announced Nov. 17 is that Petro-Canada is prepared to tear up existing contracts, void supply agreements and swallow the penalties, confident it can strike better deals in these tough economic times.

Of all the nine oil sands-related projects to be deferred, delayed or cancelled in the last few weeks, Fort Hills had become the barometer of how drastically the economy had soured. Had it gone ahead without any changes it would have been one of the largest capital projects in Canadian history.

Unusual times, measures

“The current costs of Fort Hills were pegged this summer. Since then oil prices have dropped. We’re facing a lot of uncertainty in the financial markets,” he said.

“The good news is we can take advantage of the softening market to sharpen our pencils and drive the cost down. This is a big undertaking and we need to take the extra time to get it right.”

While declaring that every contract and purchase order is on the table, Carmata said Petro-Canada was not saying that all contracts will be cancelled.

“But we’ll be revisiting every one of those suppliers, every one of those contractors and having a little chat about how much more hungry they are than they were a few months ago,” Carmata said, adding he expects “contractors and suppliers are going to line up for us … if other contractors are hungrier we’ll be talking to them.”

Time to reassess

He admitted there could be penalties, but insisted Petro-Canada could not estimate what those costs might total.

Will Roach, chief executive officer of UTS, said that “in this rapidly changing business environment, it’s a wise move to take some more time to reassess the mine and extraction cost estimate (currently about C$14 billion) and schedule before proceeding.”

He said that stopping work on the C$10 billion upgrader “significantly” eases the near-term pressures on UTS to secure financing without having any cash flow.

Carmata said several options to process Fort Hills bitumen are being explored, noting that Petro-Canada has recently revamped its Edmonton refinery to handle oil sands crude and plans to build a coker in Montreal.

He would not say whether Petro-Canada would look for upgrading in the United States beyond commenting that “we are looking at other options that we don’t want to get into.”

“We do have to cover off our bitumen marketing,” he said, adding “we may be long on bitumen for a while” if Fort Hills comes onstream in late 2012 or early 2013 at 160,000 barrels per day.

Chris Feltin, an analyst at Tristone Capital, said shelving the upgrader will reduce the overall capital costs, but a “non-integrated mining project provides marginal economic returns.

Carmata said early discussions will take place with the Alberta government on leases setting a 2011 startup for Fort Hills production, noting that the partners “need some relief on that schedule.”

Alberta Energy Minister Mel Knight was not troubled by that prospect, suggesting that as oil sands companies “reposition themselves and find the capital that they need, the projects will be back on the table.

“Alberta produces oil because the world needs oil and that scenario won’t change anytime soon,” he said.