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Hearn downgrading Kearl’s upgrader Imperial backs away from including Fort McMurray refinery in oil sands mega-project; CEO troubled by ‘gold rush mentality’ Gary Park Petroleum News Canadian Contributing Writer
For some it was the sound of the first domino falling.
For others it was merely a nervous shuffling of the tiles.
But when Imperial Oil, Canada’s largest integrated oil company, makes any kind of move it draws attention, whatever the deeper significance.
And Chief Executive Officer Tim Hearn gave observers of the oil sands scene plenty to contemplate, whether they are outright boosters or deep-seated doubters.
Over recent months, as the line-up of projects for the next 15 years has climbed past the C$100 billion mark, the industry’s ability to see all of the plans through to completion has been called into question.
Fort McMurray, at the center of the oil sands region in northeastern Alberta, has been bursting at the seams over a long period, struggling to provide basic servicing, housing, health care and educational facilities.
The squeeze on experienced construction labor and engineers; the demand on materials; and the ability of smaller players to raise financing have been accumulating faster than the industry has provided answers. Imperial takes upgrader off table Hearn offered the most pointed assessment yet by a corporate leader of the challenges posed by the overheated oil sands sector, which he described as a “gold rush mentality” which Imperial is not prepared to join.
In meeting with analysts, he told them Imperial was taking off the table plans to build an upgrader, to turn raw bitumen into synthetic crude, in the Fort McMurray area as a key part of the C$4.5 billion-$6.5 billion, 300,000 barrel per day Kearl project by Imperial Oil and sister company ExxonMobil Canada.
“We’re short of people and we’re short of infrastructure and the result is that we’re getting really, really high inflation and very high costs and that’s not really the best outcome for any of us,” he said.
“As a lot of these (upgrader) investments come on stream over time and there’s surplus capacity, bad things happen.”
Hearn warned that unless the upgrading is competitive a “lot of pain” could occur and he has no intention of putting “our company, or our people, or our shareholders through that if I can find a different path forward.”
Taking his own advice to be “wise and judicious,” Hearn said Imperial has ruled out building an upgrader at the Kearl mine site for the first 100,000 bpd phase. Existing refineries will be used Instead it expects to use its existing refineries in Alberta and Ontario to handle two-thirds of the start-up volumes, while selling the balance to third-party refiners.
He said Imperial will pursue low-cost additions to those refineries to allow them to process more heavy oil as the first step towards refining the synthetic crude into various fuel products.
The company’s own assessment showed the cost of building an upgrader is 70 percent more expensive at Fort McMurray than on the U.S. Gulf Coast and 40 percent more than at Edmonton.
“I think the first phase is very manageable and low-risk for us,” he said. “From an economic point of view (adding to existing refineries) is the wisest first step.”
Assuming Imperial moves to the next two 100,000 bpd stages, Hearn was reluctant to say how the upgrading will be handled.
The regulatory documents filed for Kearl earlier this year reflected that uncertainty, indicating only that upgrader plans would be part of a separate application. Hearn: too many upgrades proposed Hearn’s reading is simply that too many upgrades have been proposed as part of the scramble to handle new production from the oil sands by either building new refineries or reconfiguring existing Canadian plants, which can process 2.5 million bpd although only 360,000 bpd or 14 percent can be heavy oil.
In addition to the facilities owned by Syncrude Canada, Succor Energy and Shell Canada, other upgrader plans are part of major mining operations by Canadian Natural, Nixon and Canadian Natural Resources, while Petrol-Canada is spending C$1.6 billion to increase heavy oil capacity at its Edmonton refinery from 50,000 bpd to 135,000 bpd.
Alberta’s energy regulator has also approved Canada’s first stand-alone upgrader by privately held BA Energy, which aims to come on stream in three stages to reach 250,000 bpd by about 2011.
First Energy Capital analyst Mark Friesen issued a cautionary note recently by warning that the oil sands region is over-heated, making it likely that some projects will be deferred or scrapped.
EnCana pointed in that direction in November by deciding that exporting bitumen to the U.S. for upgrading would be a better economic bet than building its own plant. High oil price assumptions also an issue Hearn also said the oil price assumptions held by some companies are open to question.
“It seems that everyone has concluded that we will have high energy prices forever,” he said. “That may be true, but it may not. There is a fair amount of non-OPEC capacity coming on stream.
“If there’s any kind of economic slowdown and surpluses start to widen again, there’s a reasonable chance that prices could come off.”
Imperial has ample experience on which to base its concerns.
Hearn noted that the company’s highly successful Cold Lake heavy oil operation, now producing 137,000 bpd, has survived commodity-price swings over the past two decades that would have threatened the venture’s economic viability if an upgrader had been incorporated in the plant.
“I’m not sure the place would be operating today,” he said. Institute: spinoff could be C$1 trillion Countering that thinking, Vincent Lauerman, global energy analyst with the Canadian Energy Research Institute, suggested that a drop in oil prices might trim the profits from an upgrader, although the facility would continue to operate to recover some costs.
The institute has estimated the economic spinoff for Canada from upgrading could be worth more than C$1 trillion by 2020, based on average oil prices of US$32 per barrel and oil sands output of 3.2 million bpd.
Alberta Energy Minister Greg Melchin is one of the strong advocates of capturing a greater share of bitumen’s value by doing more than just exporting the raw product.
His government is working with 16 industry players to examine the potential benefits of a C$7 billion, 300,000 bpd refinery and petrochemical complex near Edmonton.
On the pipeline front, Hearn said Imperial is holding talks with the companies — such as Enbridge, Kinder Morgan, TransCanada and Altex Energy — seeking support for various new lines to the U.S. Midwest, Gulf Coast, California and possibly Asia.
“Our position is to just work with the various proponents at this point … and look at what might be appropriate for us,” he said.
Imperial Senior Vice President Randy Broiles indicated to analysts that Imperial is not counting on all the pipelines being built. “We think a few will materialize by the end of the decade,” he said.
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