October 9, 2008 at 2:38 am #3391
Market woes hit oil sands projects
NORVAL SCOTT Tuesday, October 07, 2008
CALGARY The global financial crisis is threatening new Alberta oil sands processing projects, as tighter credit lines and lower oil prices cause companies to look for cheaper alternatives.
Most at risk are upgraders, the sprawling facilities where heavy crude, or bitumen, is processed into a lighter synthetic product that can be handled by more refineries.
Upgraders can cost up to $12-billion. Financing woes aren’t the only roadblock: The price difference between bitumen and synthetic crude has narrowed, leaving less value for upgraders to capture.
While North American demand for heavy crude has increased as refiners seek to take advantage of Canadian supplies, oil sands production has lagged expectations.
At least 10 new upgraders are being built in Alberta or are under consideration, backed by major companies including Statoil ASA, Royal Dutch Shell, Canadian Natural Resources Ltd., and Total SA.
But some plans may be revised. One company, privately-held BA Energy Inc., has already pushed back its proposed $5-billion upgrader, arguing it’s too expensive to raise money now and that market fundamentals don’t support the project at this point. Others could follow suit, meaning that processing work that would have taken place in Alberta is instead carried out by refiners in the United States and many of the economic benefits of oil sands development including well-paid jobs would migrate south.
Today’s financial environment is very difficult, said Columba Yeung, chief executive officer of Value Creation Inc., BA Energy’s parent company. The oil price is still quite strong but the differentials [between bitumen and synthetic crude] are low. That’s discouraging people from considering upgrading.
Value Creation hasn’t shelved the BA Energy upgrader, but it will prioritize the development of its oil sands steam extraction project, bringing bitumen production on stream first. It will still look to build its upgrader and is seeking a partner, but the project could be delayed for between 18 months and three years, Dr. Yeung said.
Other companies are feeling the pinch too: Last month, the partners behind the Fort Hills mine and upgrader said the project would now cost as much as $23.8-billion, more than 50 per cent over previous estimates. The consortium says it is now looking at retooling the project.
It’s pretty tough to justify building an upgrader in Alberta today when the bitumen price and the capital costs are so high, said Justin Bouchard, a Calgary-based analyst with Raymond James.
Instead of building an upgrader such as at Fort Hills, which needs an oil price of around $90 a barrel to create returns, the returns are better if companies find a U.S. refining partner to take their bitumen production, he added.
But even companies with a U.S. outlet are facing the same pricing pressures. [The situation] does appear more fragile, based on cancellations, suspensions, [new] cost estimates and a very shaky capital and credit market, said Richard Gusella, CEO of Connacher Oil and Gas Ltd., which Tuesday cancelled plans to expand its small refinery in Montana.
October 9, 2008 at 2:42 am #6525
Here is update on impact of global financial crisis on some new Oil Sands projects as credit tightens, oil price drops and heavy crude differentials shrink.
This article mentions BA Energy upgrader that has been pushed back, the small Montana Connacher Refinery Bitumen project has been canceled, and the Fort Hills Upgrader may be retooled but was more impacted by usual 50% cost increase to $23 Billion than the other financial & oil market impacts upon the others.
There are still over 10 new upgraders in just Alberta area being built or moving to construction stage however.
The decrease between Bitumen and Syncrude oil price will impact choices on type of Bitumen blend made at upgraders and the timing of phases to bring upgrade cokers online.
October 9, 2008 at 1:06 pm #6523
<FYI – Armageddon or OTO Buy Opportunity? – CR comment>
‘Armageddon’ in the oil patch
NORVAL SCOTT From Thursday’s Globe and Mail October 8, 2008 at 9:12 PM EDT
CALGARY Jeffery Tonken has lost a fortune over the past six weeks. It’s Armageddon out there, Mr. Tonken, the chief executive officer of junior oil and gas company Birchcliff Energy Ltd., said Wednesday. I’ve lost millions. Everyone has.
The value of Canada’s energy companies has been devastated since oil plunged from record levels in the summer. Among the 58 companies in the S&P/TSX capped energy index, about $110-billion in market value has been wiped out in the past six weeks, calculations show.
Despite being one of the success stories of 2008 Birchcliff has capitalized on the B.C. gas rush the company’s shares have plunged from almost $16 in July to just over $6 today.
Mr. Tonken is far from alone. While the price of oil has fallen from $147 (U.S.) a barrel in July to below $90, the value of Canada’s energy firms has been hit disproportionately as hedge funds and other investors liquidate their positions in sectors in which they had bought heavily, such as energy.
There’s some chaos and panic selling, and people have lost sense of the fundamentals, said Harvest Energy Trust CEO John Zahary. Harvest’s unit price has fallen from $26 in June to below $11, also a hit for Mr. Zahary, who said he owns about 100,000 units.
Clearly I’ve participated in the downturn there’s a reduction in my net worth, and that of other employees and shareholders, he said. It’s a substantial sum of money that is no longer there, Mr. Zahary said.
Given the financial climate, Harvest is now unlikely to proceed with a $2-billion project to expand its refinery in Newfoundland unless it finds a partner, because that would consume too much of the company’s capital, he added.
Since Labour Day, the value of the S&P/TSX capped energy index has been cut almost in half, in comparison with the 25-per-cent loss made on the S&P/TSX composite index in the same period.
The precipitous drop isn’t just affecting trusts and juniors; oil sands giant Suncor Inc., for example, has seen its market capitalization fall from just under $70-billion in May to just over $27-billion.
Hedge funds are selling anything off their shelves that they can, said Bill Andrew, CEO of Penn West Energy Trust. The valuation of the trust one of Canada’s largest has been halved since June, and is now just over double its annual cash flow.
But fundamentally, and despite the panic, oil and gas prices are still strong enough for companies to make profits, Mr. Andrew said. It changes nothing at our operations.
One concern for investors especially in the junior side is that banks will reduce or even refuse to renew revolving lines of credit, stymieing the ability of companies to expand, Birchcliff’s Mr. Tonken said. While Birchcliff doesn’t have any debt to pay back in the short term, the company, like other juniors, will likely just spend its cash flow or even less in 2009, he added. Juniors often spend up to five times their cash flow as they chase rapid growth.
Calgary’s analysts, many of whom maintained that companies were comparatively undervalued when oil was at $140 a barrel, say there is little by rational explanation for the collapse, which means Canadian oil patch assets now appear to be hugely underpriced.
Buy some ammunition, go to the hills and hide, said William Lacey, an analyst at FirstEnergy Capital Corp. We’ve gone beyond doomsday scenarios. There’s no logic any more and this is an outright capitulation. Investors are simply throwing up their hands and saying I’m out,’ he said.
According to Mr. Lacey, the drop means that companies will be re-evaluating their future strategies, and will now increasingly buy back their own shares because those are the cheapest barrels out there right now.
Nexen Inc., which historically hasn’t bought many of its own shares, has snapped up stock worth $300-million since the beginning of August. Analysts are also watching plans by EnCana Corp., Canada’s largest energy company, to split itself into two separate entities, one focused on gas, the other on oil sands.
Floating an oil company in the current climate means EnCana’s oil sands assets, rated among the highest quality in Alberta, could be quickly poached by a larger oil company at a very low price, Mr. Lacey said. EnCana spokesman Alan Boras said that while the company is watching the situation, it’s still moving towards completing its split early next year.
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