Oil sands best hope for cap-ex hike

Companies still edgy over late 1990’s prices; new wave of oil sands projects could rescue E&P investment

Gary Park

Petroleum News Calgary correspondent

A proliferation of income trusts that is gutting the mid-size E&P sector and a pullback by several majors from Western Canada’s conventional oil and natural gas plays are likely to take a bite out of upstream spending in 2004.

But a new wave of oil sands projects could rescue overall capital investment in the E&P sector.

For now, only five of the senior producers have disclosed their 2004 budgets. The bulk will not show their hand until next year.

Still hanging over the industry is the impact that US$12 per barrel oil and low natural gas prices in 1998 and 1999 had on confidence levels, Bill Andrew, president of Penn West Petroleum, told a late summer RBC Capital Markets conference.

“Everybody was struggling with debt and trying to pay down debt and there was not much time to worry about the future because we were pretty damned worried about surviving,” he said.

Andrew said it has taken the last few years to restore confidence and see companies in Western Canada look at new prospects and areas.

He said investment markets have also put a squeeze on the ability of companies to drill for deeper gas rather than safer, shallower gas pools.

“The focus is on us for results and cost control and there is no focus on us for what we really bring to the table, which is really innovation” in exploring new areas and applying new techniques to bring oil and gas out of the ground.

Andrew said the mid-cap and larger companies have the innovative skills to take up the challenge of more complex exploration, but they need some assurance that they can apply those skills “without getting booted across the field” by the markets.

With companies such as EnCana, Marathon Oil, Murphy Oil and ChevronTexaco looking to unload their conventional assets in Western Canada, the list of potential buyers tends to start with income trusts, whose ranks have grown by eight new companies this year, bringing the total to 27.

A number of smaller E&P companies have opted to convert to trusts and take advantage of tax benefits while exploiting the reserves of mature properties.

But the trust emphasis on distributing cash flow to unit holders has been a drain on traditional exploration, although there are signs that, with the asset market drying up, trusts are increasingly hiring geologists and drilling engineers to extract more from development wells.

Five producers have announced 2004 budgets

• Imperial Oil

For the third straight year, Canada’s largest integrated oil company has set spending at C$1.5 billion.

Chief Executive Officer Tim Hearn said the budget will be “financed from internally generated funds.”

A detailed breakdown won’t be released until 2004, but the company has indicated that about two-thirds will be spent upstream covering such projects as the Cold Lake heavy oil complex in northeastern Alberta, the Syncrude Canada oil sands consortium, the Sable natural gas project offshore Nova Scotia and the Mackenzie Delta gas project.

• Petro-Canada

The company plans to spend C$2.59 billion on capital projects, up a mere C$70 million from 2003, with a heavy emphasis on upgrading two refineries to meet tougher federal sulfur standards, and feed a growing global portfolio in the United Kingdom, the Netherlands, Venezuela, Syria and Tunisia.

Internationally, Petro-Canada has tagged C$640 million, up from C$580 million this year, with C$240 million going to existing operations and C$400 million to new developments and exploration.

As predicted by Chief Executive Officer Ron Brenneman, North American gas spending will shrink to C$495 million from C$500 million.

About C$460 million will go to existing opportunities in Western Canada and about C$35 million to the Mackenzie Delta/Corridor and Alaska to assess future opportunities.

The oil sands will claim C$320 million, a drop of C$110 million from 2003, with C$305 million dedicated to the company’s stake in Syncrude Canada, its MacKay River bitumen project and the delineation of future bitumen resources.

The East Coast offshore will consume C$325 million, a drop of C$35 million from this year. The producing Hibernia and Terra Nova oil fields will get C$140 million and development costs for the White Rose project will take C$180 million.

Exploration spending for 2004 is expected to be divided between C$150 million in North America and C$135 million internationally.

• Suncor Energy

The oil sands major and one of Canada’s five integrated oil companies has set spending at C$1.7 billion for 2004, an increase of about 15 percent from 2003, with more than half tagged for “growth initiatives.”

About C4750 million will go to oil sands growth, including development of Suncor’s Firebag leases and upgrader expansions that could raise production to 260,000 bpd from its third-quarter average of 231,000 bpd.

Including sustaining capital and preliminary spending on long-term growth opportunities, total oil sands spending is projected at C$1 billion.

Other key items include C$215 million to support Suncor’s goal of profitably growing natural gas production, while C$330 million will go towards meeting federal regulations for diesel desulphurization at an Ontario refinery.

• Shell Canada

The cap-ex plan has climbed to C$1.1 billion for 2004 from this year’s expected C$800 million, with about half directed at exploration and development programs in the Foothills area of Western Canada.

The balance will go mainly to frontier activities, including an unspecified amount for the Mackenzie Valley gas pipeline project and related development of Shell’s Niglintgak field on the Mackenzie Delta, along with development of Tier 2 fields and related facilities for the Sable gas project offshore Nova Scotia.

About C$155 million will be needed for potential debottlenecking work at the year-old Athabasca oil sands project and pre-feasibility studies for future expansion of that operation.

President and Chief Executive Officer Linda Cook said the investment plan reflects the strength and diversity of Shell Canada’s growth portfolio.

• Canadian Natural Resources

The independent with an expanding global reach has earmarked C$2.49-$2.89 billion for next year, but has slashed its acquisitions spending to about C$60 million from C$300 million in 2003.

Of the total, about C$1.5 billion will be allocated to Western Canada, dominated by C$928 million for natural gas.

Depending on whether the company’s board of directors gives a final go-ahead for the C$8 billion Horizon oil sands project that venture could attract spending of C$200-$600 million, with C$690 million split between offshore activities in the North Sea and West Africa.

Plans call for about 921 gas wells followed by 1,070 in 2005, along with 425 and 435 recompletions, respectively. Oil drilling will account for 384 wells, down from 467 in 2003.

Canadian Natural is targeting a 6 percent increase in gas production of 1.32-1.4 billion cubic feet per day (excluding its share of British Columbia’s fast-depleting Ladyfern field) and a 7 percent jump in oil and liquids volumes to 247,000-272,000 barrels per day.

Chief Financial Officer Steve Laut estimated at C$1.3 billion of cap-ex is needed “just to keep production flat.”