Capital spending cuts delay oil sands projects

Sam Fletcher
Senior Writer

HOUSTON, Oct. 31 -- Suncor Energy Inc. and Petro-Canada are trimming their capital expenditure budgets and delaying some of the plans for their oil sands production projects next year.

After "a thorough review" of financial market conditions, Suncor directors reduced their 2009 capex budget to $6 billion (Can.) from an earlier proposed $10 billion. Of that budget, $3.6 billion, or 60%, is earmarked for the company's development of its $20.6 billion Voyageur oil sands project.

Suncor will scale down investment and construction of its Voyageur upgrader, delaying its completion until 2013 rather than 2012 as earlier planned. The delay means Suncor can finance more of the upgrade project out of cash flow rather than rely on increasingly skittish debt markets.

The Fort Hills consortium headed by Petro-Canada said it also will delay building a planned upgrader and instead will construct only its planned oil sands mine at its $23.8-billion Fort Hills project. The Suncor and Petro-Canada projects are among the most expensive projects ever undertaken in Canada.

Upgraders are processing facilities that turn oil sands bitumen into a lighter, synthetic product that can be processed by more refineries. Alberta is anxious to ensure that the costly upgraders are built within the province, rather than in the US, to generate more local jobs.

"Our aim is to ensure we are living within our means during a time of market uncertainty, while also making the strategic spending decisions that will allow us to continue on our growth path," said Rick George, president and chief executive officer.

Suncor 2009-10 projects
Suncor's 2009 plan maintains spending and construction timelines for the third and fourth stages of its Firebag in-situ operations, part of the $20.6 billion Voyageur strategy. Completion of the two stages (in 2009 and 2010, respectively) is expected to increase bitumen production and future cash flow.

Stages 5 and 6 are at "relatively early phases" of development, so spending and scheduling plans can respond to market conditions. "We remain committed to an integrated expansion strategy and targeted oil sands production of 550,000 b/d, said George.

In addition, Suncor plans to spend $2.4 billion in support of its base business. Some 1.7 billion is targeted for the company's oil sands operations, including new extraction facilities and various projects to improve the reliability and productivity of oil sand properties. Investments in emission-control equipment also will continue in 2009.

Suncor will spend $300 million on exploration and production and $400 in maintenance and environmental improvements in its refining and marketing operations. It expects similar levels of capital spending through 2012. Suncor will finance its capital spending through undrawn credit facilities and cash flow from operations.

Fort Hills project
The Fort Hills consortium—Teck Cominco, UTS Energy, and project operator Petro-Canada—said last month the cost of its oil sands project had escalated more than 50% to $21 billion—$19.6 billion (US)—in just over a year to more than the combined $19 billion market value of the consortium partners, forcing them to find ways to reduce capital expenditures.

Oil prices have fallen by more than half from a July high of $147/bbl (US). Some say the economics of integrated oil sands projects require long-term prices of $85/bbl for a solid rate of return. Meanwhile, the difference between bitumen and synthetic crude has narrowed, leaving less value for the facilities to capture.

Oil sands outlook
According to the Canadian Association of Petroleum Producers, current oil sands production is 1 million b/d and was expected to increase to 4 million b/d by 2020. Current oil sands production is about 1 million b/d of oil. The largest of three oil sands deposits in Alberta is at Fort McMurray; the other two are at Peace River and Cold Lake. There are more than 20 active mining and in-situ oil sands projects in those areas.

Some analysts are anticipating a 10-15% drop in capital spending in western Canada next year as producers try to remain within their cash-flow expectations. To many observers, this is a sign that low oil prices are starting to discourage new investment. Projects that were feasible a year ago no longer seem economic in the current environment. Other companies, including the Nexen Inc.-OPTI Canada partnership and privately held BA Energy Inc., announced delays at smaller projects in recent weeks.

Olivier Jakob, Petromatrix, Zug, Switzerland, earlier reported, "Medium to small size E&P companies have started to be hurt by the credit crunch and are now starting to be hurt by limited cash flows linked to the lower oil prices."

On the other hand, the project postponements may mean the end to Alberta's spiraling costs due to the scarcity of workers and material in Alberta. Some say such shortages have escalated the price of new projects and crippled regional productivity. Some now predict workers will be available at lower salaries in 6 months.

Contact Sam Fletcher at samf@ogjonline.com.

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