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Petro-Canada Plans C$26.2 Billion Oil-Sands Project (Update7)
By Ian McKinnon
June 28 (Bloomberg) -- Petro-Canada, the third-largest oil company in Canada, and its partners will spend C$26.2 billion ($24.6 billion) on an oil-sands project in northern Alberta that's one of the world's most costly energy developments.
The Fort Hills project is expected to produce 280,000 barrels of oil a day from the tar-like deposits by 2014, with output starting in the second quarter of 2012, the Calgary-based company said today in a statement. The project, under development for more than five years, will tap oil reserves second only to those in Saudi Arabia.
Producers are turning to unconventional sources for oil such as Alberta's tar sands to replenish reserves as more easily tapped reservoirs become harder, and more costly, to find. Instability in oil-producer Nigeria and efforts by Russia and Venezuela to take control of energy projects from foreign companies makes Canada an attractive alternative.
``It's a safe supply of oil,'' said Chris Feltin, an analyst at Calgary brokerage Tristone Capital Inc. who rates Petro- Canada's shares at ``outperform'' and owns none. ``Look at the people who left Venezuela this week. It wouldn't surprise me to see Exxon and Chevron try to get a bigger position in the oil sands now.''
Exxon Mobil Corp. and ConocoPhillips are leaving Venezuela after failing to reach agreement with the government of President Hugo Chavez over an increased government stake in heavy-oil projects in the country.
Sakhalin-2
Fort Hills will be more costly than the $22 billion Sakhalin-2 oil and gas project, north of Japan. Russia's OAO Gazprom agreed to acquire a controlling stake in the project in December from Royal Dutch Shell Plc and Japanese partners Mitsui & Co. and Mitsubishi Corp.
Petro-Canada, UTS Energy Corp. and Teck Cominco Ltd. spent months reviewing the Fort Hills design to reduce costs. The project will be built in two stages to ease demand for skilled construction workers. A final decision on proceeding with the project will be made in the third quarter of 2008, Petro-Canada said.
Shares of Petro-Canada rose 1 cent to C$55.33 on the Toronto Stock Exchange. UTS shares rose 8 cents, or 1.3 percent, to C$6.02, and Teck Cominco's shares dropped $1.10, or 2.4 percent, to C$44.84.
Engineering Expenses
The cost estimates exclude preliminary engineering expenses and third-party investments in areas such as pipelines, power generation and work camps, Neil Camarta, Petro-Canada's senior vice president for oil sands, said on a conference call with analysts and investors. Including those expenses, the total price tag for the project would be C$33.4 billion, he said.
Including previous spending and planned expansions, Fort Hills is the fourth-most-costly oil-sands project in Canada, said Pauline Dingwall, an analyst at Edinburgh-based consultant Wood Mackenzie. Joint venture Syncrude Canada Ltd. ranks first at C$44 billion, followed by projects by Shell and Suncor Energy Inc., she said in an interview.
Petro-Canada and partners are waiting for regulatory approval to build a plant that will convert the tar-like bitumen mined from the sands into marketable synthetic crude oil, Chief Executive Officer Ron Brenneman said in the statement.
The C$14.1 billion first stage is expected to produce 140,000 barrels of synthetic crude oil per day by the second quarter of 2012. A second phase will cost C$12.1 billion. Land owned by the partners to support the project may contain as much as 5 billion barrels of bitumen, Petro-Canada has said.
Expected Returns
The initial phase will earn a return of 8.2 percent with oil selling at $45 a barrel, Camarta said. The return jumps to about 12 percent with oil at $60, he said.
``At first blush, this doesn't look like a high-return project,'' said Jim Hall, who manages about C$900 million at Calgary-based Mawer Investment Management including 500,000 Petro-Canada shares. ``They're really going to have to sharpen their pencils to improve the return.''
The oil sands, 750 kilometers (466 miles) north of Calgary, are estimated to contain 175 billion barrels of recoverable oil, second only to Saudi Arabia's 259 billion barrels, according to the Canadian Association of Petroleum Producers. Tar-like bitumen must be processed into synthetic crude oil for sale to refiners for processing into fuels such as gasoline and diesel
Petro-Canada owns 55 percent of Fort Hills. UTS, also based in Calgary, holds 30 percent and Vancouver-based Teck Cominco, the world's biggest zinc miner, owns the remaining 15 percent.
Imperial Oil Ltd., 70 percent owned by Irving, Texas-based Exxon, is Canada's largest oil company by 2006 sales, followed by EnCana Corp.
Petro-Canada produces oil and natural gas in North America, Africa and the U.K. It also owns refineries and a national chain of fuel stations in Canada.
To contact the reporter on this story: Ian McKinnon in Calgary at imckinnon@bloomberg.net
Last Updated: June 28, 2007 16:19 EDT
