Petro Canada is the "official energy supplier" to the Olympics. Perhaps that could shelve that disastrous project as well?
--M
Petrocan syndicate puts Fort Hills on ice
Consortium shelves oil sands project, citing global financial turmoil, lower oil prices and high financing costs
NORVAL SCOTT
November 18, 2008
CALGARY -- The Fort Hills oil sands project was going to turn Petro-Canada into a contender.
Its 140,000 barrels a day of new crude output would end years of underperformance. No longer would Petrocan's share price lag those of its peers.
But now, those dreams are on hold. Fort Hills has become the latest oil sands project to be derailed by the global financial crisis, as lower commodity prices and the higher cost of acquiring cash destroy the economics of developing in Alberta's high-cost environment.
The Fort Hills consortium - including operator Petro-Canada, mining firm Teck Cominco Ltd. and Calgary-based junior UTS Energy Ltd. - yesterday deferred a decision on whether to build a $13.9-billion oil sands mine until 2009. The consortium also put plans to build a $9.9-billion upgrader on hold indefinitely.
"We'll be pulling on the purse strings," Neil Camarta, Petrocan's vice-president of oil sands, said on a conference call. The group, which had been expected to decide about the mine by year-end, will now look to reduce its costs by renegotiating deals with existing contractors, he added.
The deferral means Fort Hills won't produce oil by 2011, as required by the terms of its oil sands lease. As a result, the consortium must renegotiate its contract with Alberta if development is to continue.
The financial crisis has placed heavy pressure on oil sands developers. While most projects appeared hugely profitable when oil was at $147 (U.S.) a barrel in early July, now prices have fallen to under $60 a barrel, a level where most developments aren't anywhere near viable. As a result, almost every new project on the table has now been delayed or reconfigured.
Projects that include upgraders - expensive facilities that process bitumen into lighter crude that can be received by more refineries - have been particularly affected. Building an upgrader is far more expensive than convincing a U.S. company to adapt its refinery to take more heavy crude, a route pursued with success by EnCana Corp. and Husky Energy Inc.
For Petrocan, the decision to delay Fort Hills temporarily deprives the company of the major growth project it covets. But that's not necessarily a bad thing; Fort Hills doesn't contain the best oil sands resources in Alberta and some observers have argued that raising the money to pursue the development there would prove dilutive to investors.
"The key concern with Petrocan was that it was outspending its cash flows on projects that were deemed to be marginal," said William Lacey, a Calgary-based analyst with FirstEnergy Capital Corp. "Now they'll get their costs in line and live within their means."
But ironically, given that Fort Hills was supposed to help Petrocan catch up to its peers, the real winner of the project's delay could be Imperial Oil Ltd., one of the company's rivals. Imperial's Kearl oil sands mine was scheduled to be built at the same time as Fort Hills, and the deferral means Imperial now faces less competition for workers and materials when building its own project.
"The world's aligning beautifully for Imperial," Mr. Lacey said. "They may be the first ones out of the gate to show what the [cost] ramifications [of the oil sands slowdown] are."
http://www.theglobeandmail.com/servlet/story/LAC.20081118.RFORTHILLS18/T...
