Canadian Natural's cuts a blow to oil patch
Company scales back Horizon spending as list of stalled oil sands projects grows; 'this environment is scary'
NORVAL SCOTT
November 7, 2008
CALGARY -- The bulk of the next phase of the oil sands is effectively on hold.
Canadian Natural Resources Ltd. slashed spending yesterday on its Horizon oil sands project, its biggest development ever, because of spiralling costs and lower oil prices, joining a long list of producers that have significantly scaled back or altered their plans.
The industry-wide cuts threaten the long-term development of the oil sands, the driver of Alberta's economy.
While existing projects are still being developed, much of the expansion that had been planned now faces delays, cutbacks or restructuring as producers struggle to develop bitumen resources amid the credit crisis. It could mean the loss of billions of dollars in capital investment as projects are delayed or even cancelled.
"This environment is scary," Canadian Natural's chief operating officer Steve Laut said in an interview. "We are not going to build in a high-price environment for a moderate-price world."
The global crisis has pushed up the cost of acquiring capital and created fears about future crude demand, forcing companies to re-examine the viability of oil sands development. The price of oil is down by more than half since hitting $147 (U.S.) a barrel in July, and now hovers at about $60, a point where most new projects don't appear to provide economic returns.
If the price rebounds, energy companies will of course change their plans again.
Canadian Natural said yesterday that it will spend $574-million (Canadian) on Horizon in 2009, down from 2008's $4-billion. The company is just completing the construction of the first phase of Horizon.
It was expected to spend aggressively on further expansion next year.
However, the oil sands boom means labour and materials costs in the region are now about double those of just three years ago, Mr. Laut said.
The company is cutting spending in the hope that lower regional activity will reduce costs, but it could take a year or more for that to happen, he added.
Of the companies developing the next wave of major projects in the oil sands, only two - EnCana Corp. and Husky Energy Inc. - have not announced major changes or delays in recent months.
Both have reached agreements with U.S. refiners to process future bitumen production, cutting costs and allowing development to proceed.
Other producers haven't reached deals with refiners and are pursuing alternatives, such as building new upgraders, which improve bitumen so it can be processed by refineries.
But upgraders cost billions to build and don't provide returns at current prices, so companies like Petro-Canada are considering shelving them in favour of building the mine portion of their projects first.
Of the seven upgraders that were expected to be built in "Upgrader Alley" near Edmonton, representing $93-billion of new investment in Alberta's economy, only one - a project already under way by Royal Dutch Shell - is certain to go ahead, said Neil Shelly, executive director of Alberta's Industrial Heartland Association.
"Virtually every upgrader is being re-evaluated and revisited," he said.
Even so, industry observers said the delays and spending cuts won't mean job losses in the boom town of Fort McMurray, Alta. - at least not yet.
There are still enough projects employing thousands of skilled workers to provide employment for the available work force, said Cheryl Knight, chief executive of the Petroleum Human Resources Council of Canada.
In a separate development yesterday, Alberta's Conservative government introduced legislation that turns its higher oil and gas royalty framework into law. Producers have campaigned against the new royalties, saying they make new projects less profitable and thus less likely to be built.
Canadian Natural (CNQ)
Close: $53.40, down $7.01
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OIL SANDS DELAYS
Royal Dutch Shell has postponed a planned 100,000-barrel-a-day expansion of its 155,000-b/d Athabasca oil sands mine, almost certainly delaying plans to build a new upgrader.
Suncor has slowed construction of its $20.6-billion Voyageur oil sands project, delaying the completion date of its upgrader to 2013 from 2012.
The consortium behind the $23.8-billion Fort Hills development, which includes Petro-Canada, Teck Cominco Ltd. and UTS Energy Corp., will likely delay building the upgrader part of that project as it seeks a cheaper way of getting crude to market.
The partners behind the Long Lake project, Nexen Inc. and OPTI Canada Ltd., have delayed a decision to expand that operation.
Privately held Value Creation Inc. has pushed back its proposed $5-billion upgrader by up to three years as it seeks a partner.
Imperial Oil, in August, pushed back an investment decision on its Kearl oil sands project into 2009, although the company is still bullish about development.
Total SA, in May, pushed back the on-stream date of its Joslyn mine to 2014 from 2013 because of regulatory delays and outlook uncertainty. The project was originally expected to be in service by 2010.
StatoilHydro, based in Norway, pushed its upgrader back in May to 2016 from 2014 because of potential regulatory issues relating to the sale of oil sands crude in the United States. Norval Scott
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