When the Canadian Association of Petroleum Producers issues its annual crude oil forecast in June it expects to stick with last year’s target of a doubling of oil sands output to 3.8 million barrels per day over the next 20 years. Others show signs of being less bullish.
Faced with opposition from all sides to pipeline expansions out of Alberta, rising capital costs, tighter Canadian government limits on foreign investment, wild swings in Canadian crude prices and softening returns, the investment community seems to have tempered its enthusiasm for the resource.
Calgary-based investment bank Peters & Co. estimated in late May that 11 billion barrels of recoverable oil sands reserves valued at an estimated C$17 billion were put up for sale in 2012.
A handful of oil sands owners have been stalled in their efforts to find buyers, with Marathon Oil being the latest to call off its search for someone to buy its 20 percent stake in the Athabasca Oil Sands Project, AOSP, operated by Shell.
It followed ConocoPhillips and Koch Industries, which put sizeable assets on the block in the past 18 months, but took most off the market when bids failed to meet their expectations.
Murphy Oil and Athabasca Oil Corp., AOC, have also come up empty handed in their search for buyers or partners, although AOC has told its shareholders not to give up hope.
Marathon’s AOSP share
Marathon has a 20 percent stake in the 255,000 bpd AOSP project, which has regulatory approval to expand to 470,000 bpd. Shell controls 60 percent and Chevron 20 percent.
Marathon has been engaged in talks to sell half of its share to a joint venture of four of India’s state-owned companies, but the chances of a deal collapsed when the JV participants kept asking for more time, apparently because they were unable to obtain a green light from the Indian government.
“An agreement was not reached with the prospective purchaser and negotiations have been terminated,” Marathon said. “Marathon Oil is not engaged in further discussions with respect to a potential sale of these assets.”
The prospective oil sands deal was not included in a corporate target to divest US$1.5 billion-$3 billion of assets in the 2011-2013 period, the company said.
Marathon said its stake in AOSP generated C$38 million in the first quarter, compared with C$17 million a year earlier.
Conoco also looking to sell
Less clear is where ConocoPhillips is heading in its quest to pocket US$8 billion-$10 billion through outright sales or JV deals in its mostly undeveloped oil sands holdings.
Company officials said ConocoPhillips has no need to make a hasty sale because of its strong balance sheet and has left the assets on the auction block.
A spokeswoman said “we received a ton of interest in these assets ... we are pausing to evaluate our options, not to pull back the sale of the assets.”
On the market is half of ConocoPhillips stake in the operating Surmont project, as well as the Thornbury, Clyden and Saleski leases.
Its producing properties alone sit on an estimated 30 billion barrels of recoverable oil, but observers caution they would take billions of dollars, considerable expertise and many years to develop.
ConocoPhillips has reportedly also been in talks with state-controlled firms in India, but any chance of reaching an agreement suffered a setback last year when the Canadian government made it virtually impossible for state-owned foreign enterprises to gain control of oil sands assets.
Other assets on block
Other assets back on the shelf include Shell’s Orion steam-powered, 5,000 bpd project that carried an estimate price tag of C$200 million and Koch Industries offer a year ago of six leases containing 2.9 billion barrels of recoverable bitumen that could have supported 300,000 bpd of production (one sold to Baytex Energy for C$120 million).
Jim Hall, chairman and chief investment officer with Mawer Investment Management, said prospective buyers “have better places to put their money” than into high-cost oil sands operations.
He said the projects are “single-digit-return projects, they’ve got lots of operational risk and they’ve got to overlay that on heavy oil differentials. I’m not sure I want to tie myself into a 50-year project at an 8 percent return.”
Samir Kayande, an analyst with the research firm of ITG Inc., said his firm has cooled on the oil sands over the past year, because revenues are not keeping pace with rising costs, in contrast with the past 10 years when commodity prices would always bail out investments in marginal projects.
Kayande said a West Texas Intermediate price of US$83 per barrel is the breakeven price for thermal recovery projects, compared with US$60-$70 for light oil production in the Permian basin of West Texas.
He said his firm has forecast overall Western Canada oil output will nearly double to 5.7 million bpd by 2025, with most of the gain coming from steam-powered oil sands operations.
However, Kayande said that “if profitability continues to be pressured, there’s definitely risk to our growth forecast.”
AOC was close to deal
Murphy Oil hired investment bankers last October to find a buyer for its 5 percent share of the Syncrude Canada consortium, but decided to drop the sales effort in January when executives said they needed a “compelling” offer that exceeded the current cash flow multiple of Canadian Oil Sands Ltd., Syncrude’s largest stakeholder.
Whether the oil sands have done a U-turn now hangs on AOC, which was close to a multibillion dollar joint venture with Kuwait Petroleum Corp. and Spain’s Repsol last summer to accelerate development of its Hangingstone and Birch leases until the Canadian government’s new foreign ownership rules.
AOC Vice President Andre De LeeBeeck was emphatic that partnerships are AOC’s best hope for growth and that “talks are ongoing on a number of our assets for joint ventures.”
