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Oil sands ride out storms Northern Alberta resource buffeted by multiple challenges; foreign investors take brunt; energy regulator busy with new proposals By GARY PARK For Petroleum News Bakken
No matter how much the Alberta oil sands get pilloried in the public arena and buried under a landslide of negatives the sector shows no signs of wilting.
The operating environment in the northern Alberta resource has seldom, if ever, been so unfriendly, with capital costs on the rise again, takeaway capacity in short supply, aboriginal communities and environmental organizations blocking projects on multiple fronts, regulatory processes increasingly erratic and foreign investors forced into retreat by Canadian government rules.
There is also talk that Asian investors who have set up shop in the oil sands are deeply troubled by their returns, with China Investment Corp., CIC, a US$575 billion sovereign wealth fund, coming under fire in June from China’s National Audit Office for mismanagement of its offshore investments, with managers accused of dereliction of duty and substandard due diligence.
Although the audit office did not name the specific cases, CIC’s stakes in Sunshine Oilsands (as well as Athabasca Oil Corp. and Penn West Petroleum), along with a formidable lineup of Chinese and Hong Kong stakeholders, have crumbled in value this year.
Sunshine has been unable to raise the financing it needs to restart work on its 80 percent complete West Ells thermal-recovery project, or even think about developing its other oil sands leases, while facing a stack of legal actions by creditors.
Rules blamed for decline The rules imposed by Canada that prevent outright takeovers of oil sands producers by foreign state-owned companies have been blamed for a sharp decline over the past 18 months in oil sands shares, which are 20 percent below what would otherwise have been expected, with junior companies taking a 30 percent hit, according to a study by the University of Calgary’s School of Public Policy.
The study authors said they found that the “federal government’s policy change has resulted in the material destruction of shareholder wealth.”
The small oil sands producers rely on outside investment to develop their holdings, much of it coming from joint ventures, which are still allowed under the Canadian’s government’s rules, but are facing a sharp investment drop off.
Eugene Beaulieu, director of the school’s international economics program, said the lack of clarity in the government rules is scaring off investors at a time when the sector expects to need about C$100 billion over the next five years.
But Natural Resources Minister Greg Rickford brushed off those who argue that investors no longer believe Canada is open to investment.
He told The Canadian Press that the government’s objective is to draw a distinction between free market private investment and entities that are controlled or influenced by foreign governments by ensuring that “foreign investment transactions are reviewed on their merits based on the long-term interests of the Canadian economy.”
Forward-looking activity While that debate ebbs and flows and the issues confronting oil sands companies become more tangled, there has been a flurry of forward-looking activity, with the Alberta Energy Regulator being authorized by the provincial government to approve two projects by privately owned companies, while receiving an application to expand an existing operation.
Koch Oil Sands Operating, a Canadian unit of Koch Industries, is one of the companies to receive a green light from the government for a 10,000 barrels-per-day project on its Muskwa lease, while it pursues initial regulatory work on a possible 60,000 bpd steam-driven operation which has been labeled as the Dunkirk In Situ Project.
In a terms-of-reference document for Dunkirk, Koch plans to proceed in two stages of 30,000 bpd each, which points to a capital cost in the mid range of C$2.4 billion.
The filing said Koch hopes to obtain approvals to allow a construction start in 2016, with first production scheduled for 2018.
The decision to move ahead with Dunkirk came after Koch was unable to find buyers in 2012 for all of its six properties covering 220,000 net acres.
The company is well advanced in talks with the Fort McKay First Nation, which has business ties with other oil sands operators, but has shown some unease over the level of activity on or near its lands.
Cavalier Energy The other operator on the verge of approval is Cavalier Energy, a wholly owned subsidiary of Paramount Resources which was created to take responsibility for developing Paramount’s oil sands leases.
It holds more than 200,000 net acres where 760 million barrels of estimated contingent resources have been identified in the Grand Rapids formation on the Hoole property.
Cavalier said it believes the Hoole resources are capable of producing in excess of 80,000 bpd by 2022, starting with a 10,000 bpd commercial demonstration project, with full production from its initial phase expected by the end of 2017.
The company also owns 23,000 net acres on the Eagles Nest lease, which has an estimated 178 million barrels of prospective recoverable resources from 2 billion barrels of original bitumen in place and has interests in a number of carbonate assets.
Pengrowth Energy’s filing is designed to add 17,500 bpd to its Lindberg steam-recovery project in the Cold Lake area of northeastern Alberta.
To date Lindberg production has totaled 1.2 million barrels and approvals were received a year ago to accelerate the first commercial phase to 12,500 bpd, with first production targeted for the open quarter of 2015.
Pengrowth believes it has the potential to reach 50,000 bpd by late 2018 that will generate C$600 million of free cash flow a year based on West Texas Intermediate prices of US$90 a barrel.
The company said it has the ability to ship across North America by rail and refine its heavy oil without needing to ship overseas.
Pengrowth said in June that GLJ Petroleum Consultants has increased Lindbergh’s proved plus probable reserves by 61 percent to 230 million barrels, raising the value to C$2.2 billion.
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