Petro-Canada increases investment in oil sands
But company plans to lower its financial outlay for natural gas production in Western Canada
NORVAL SCOTT
December 14, 2007
CALGARY -- Petro-Canada has joined the parade of Canadian companies that are raising their total spending next year, but also cutting exploration in Alberta's conventional oil and gas sector.
Calgary-based Petrocan said it will spend $5.3-billion in 2008, a 28-per-cent increase over 2007, and the most so far for the company, as it steps up its Fort Hills oil sands project and increases spending in Libya and off Canada's East Coast.
However, Petrocan will reduce its spending on natural gas production in Western Canada from $540-million to $415-million, following a swathe of firms who have toned down their plans in Alberta because of low gas prices, higher costs and the province's proposed new royalty structure.
Petrocan also estimates that its oil and gas production will fall because of natural declines in Canadian output, from between 400,000 to 420,000 barrels of oil equivalent a day in 2007, to between 390,000 to 420,000 b/d in 2008.
"Our natural gas [exploration] is shifting away from Western Canada due to the maturity of the basin ... while the strategic shift was planned, it has been accelerated by factors like changes to Alberta's royalty structure," chief executive officer Ron Brenneman said in a conference call. "Upstream production will probably stay at around this range until our next major projects come on stream."
Earlier yesterday, Husky Energy said it is increasing spending by 28 per cent as it targets oil sands and international opportunities, but it is reducing its budget for conventional oil and gas in Alberta. EnCana Corp., Canada's largest energy company, outlined similar plans earlier this week.
Petrocan has previously outlined five projects - its Fort Hills and Mackay River oil sands developments, its plans to convert its Edmonton and Montreal refineries to take more heavy crude, and increased gas production in Syria - as its major engines for growth, and also said earlier this week that it plans to increase investment substantially in Libya as it seeks to double its production in that country in five to seven years.
However, while the company previously expected to give the go-ahead to the Mackay River oil sands project in 2008, that might now be delayed by several months. Mr. Brenneman estimated that Alberta's new royalty regime will reduce the project's rate of return by around 2 per cent. The company will now look at the potential for integrating more of Mackay River with Fort Hills to improve the project's economics.
"The economics for in situ projects have always been challenging," Mr. Brenneman said. "We've decided to take more time." As well as the changes to Mackay River, Petrocan has increased the expected cost of retooling the Edmonton refinery to $2.2-billion from $2-billion.
Mr. Brenneman also denied that Petrocan's decision this week to pay $1.72-billion (U.S.) to buy out hedging contracts on its share of production from the Buzzard field in the North Sea was a bet that oil prices will remain high, as suggested by several analysts.
"We did that principally as our capital program through 2009 and 2010 will exceed our cash flow, so we're going to be in the market borrowing [at that time]," he said. "We wanted our cash sheet to be absolutely clean to facilitate that borrowing."
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