Petrocan talking itself out of oil sands
Andrew Willis, September 17, 2008 at 9:09 AM EDT
Petro-Canada is talking itself out of the Fort Hills oil sands project.
The latest cost estimates on the project, released late Tuesday, highlighted a 50-per-cent spike in expenses over the past 15 months, on a project that was already projected to eat up $14.1-billion. Keep in mind: This initiative still needs approvals from both the Petrocan board and government bodies.
The first take from analysts on Wednesday is Petrocan, owner of a 60 per cent stake in Fort Hills, will need to see $100-a-barrel crude oil prices to earn a 10 per cent return on Fort Hills. You know that within Petrocan and the financial community, there's a believe that costs on this project can only go one way, and far less certainty on the future price of oil.
Petrocan stock has underperformed peers for several years and the board of directors is already under justified pressure from shareholders to shake things up. This company still struggles with a risk-averse, bureaucratic culture that dates back to its days as a crown corporation. The easy course is to back away from Fort Hills.
Petrocan and its partners at Fort Hills - Teck Cominco and UTS Energy each own 20 per cent - plan to make a final decision on Fort Hills by the end of the year. UTS faces substantial financing issues as it heads towards that deadline; it needs to raise high-risk capital in a market that's risk averse. Teck Cominco is first and foremost a mining company, tied up with an increasingly complex acquisition of Fording Canadian Coal Trust. So there's no one pounding the table in favour of developing Fort Hills.
The stage is set for Petrocan to walk away from this project. There are any number of deeper-pocketed, more visionary energy companies that will make $14-billion-plus bets on the 50-year potential of the oil sands. If control of Fort Hills comes up for grabs, watch EnCana, Canadian Natural Resources, Suncor or one of the foreign energy giants to step up.
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