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Low oil prices force Devon writedown

Low oil prices force Devon writedown
Us$6.8B Loss; Will continue oil sands development
Claudia Cattaneo, Calgary Bureau Chief,
Financial Post
February 05, 2009

Low oil prices at the end of December forced U. S. oil and gas producer Devon Energy Corp. to write down all its thermal oil sands assets in Alberta, contributing to a loss of US$6.82-billion in the fourth quarter, the largest in its history.

The Oklahoma City-based company said it will not stop developing its oil sands properties, but had to take reserves off its books to comply with U. S. Securities and Exchange Commission rules, which require a valuation of reserves based on energy prices on Dec. 31.

Chris Seasons, president of Devon's Canadian subsidiary, said with oil prices of US$44.60 a barrel on Dec. 31, a $19.50 discount on heavy oil and the cost of buying diluent to transport it, the reserves no longer met the economic threshold to be classified as proved.

Mr. Seasons said Alberta's higher royalties also contributed to the charge because some oil and gas reserves were made uneconomic under the new regime.

"According to the SEC standard, if we can't look at developing an undeveloped reserve in a five-year time frame, you should be taking them off your books," he said.

Devon, which has about a third of its assets in Canada, said the US$6.8-billion loss reflected a US$7.1-billion drop, after tax reduction, in the value of its oil and gas properties.

Excluding the charge, Devon earned US$297-million in the fourth quarter, down from a profit of US$1.3-billion in 2007.

As a result of lower oil and gas prices, Devon said it would axe spending on exploration and development this year by more than 50% to between US$3.5-billion and US$4.1-billion. The company, the largest independent producer in the U. S. and a leading player in the shale gas business, expects production to remain flat at 650,000 barrels of oil equivalent a day.

"We see no reason at all to accelerate our natural gas production in this weak natural gas market," Devon CEO Larry Nichols said in a conference call. "However, we are going to continue the momentum of some of our long-term growth projects that will position us to bring on new production when oil and gas prices do recover."

In Canada, spending is being cut to $1.1-billion from $1.6-billion last year, Mr. Seasons said.

The cut in Canada is not as steep as in other areas because Devon is ramping up development of the second phase of its Jackfish thermal oil sands project and of the Horn River shale gas play in British Columbia.

Mr. Seasons said his company decided not to slow down Jackfish 2 but is putting pressure on suppliers to reduce costs.

The project can be economic with oil prices at around US$60 a barrel and "our longer term view is we still see these [oil] prices coming back," Mr. Seasons said. Jackfish 2 is expected to cost US$1-billion and produce 35,000 barrels a day.

Spending on conventional heavy oil and conventional gas is coming down, he said.

While there will be no layoffs of permanent staff, temporary staff and contract employees may be reduced.

Other major oil producers are also expected to report major reserve writedowns for the last time.

Late last year, the SEC changed its reporting rules for oil and gas reserves. Effective Jan. 1, 2010, companies will value reserves using an annual average market price, rather than a one-day price.

Companies that report to Canadian regulators, which tend to be smaller, base the value of their reserves on a reasonable projection of prices going forward.

ccattaneo@nationalpost.com

http://www.financialpost.com/news/story.html?id=1254756

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