Friday, October 24, 2008

Oil Sands slowdown

This is from Canwest news.

The cuts make sense. Oil must be reaching a price where the cost of production will be more than the price of the product given that oil sands production costs are high. Even at a reduced growth rate as the article mentions there is virtually full employment in the area. In fact I gather there is even a shortage of some skilled labor. A slower growth rate is not necessarily bad at all. Also, the environmental costs of oil sands development are quite high and not properly costed in to development. This is another reason why a slower growth is warranted. In fact many would argue that there should be a development freeze.

Friday » October 24 » 2008

Oilsands plans scaled back
Partners may delay $10-billion upgrader near Edmonton

Canwest News Service
Friday, October 24, 2008
EDMONTON - Alberta's oilsands expansion plans took a multibillion-dollar blow Thursday with news that Suncor will cut spending on capital projects and that a proposed upgrader northeast of Edmonton likely won't proceed.
Citing "turbulent times," Petro-Canada and partner UTS Energy Corp. said Thursday they may defer their
$10-billion-plus upgrader near Gibbons to cut costs at the Fort Hills project.
Petro-Canada CEO Ron Brenneman said only the mining portion of Fort Hills may proceed at this time, while the upgrader may be deferred or scrapped altogether to reduce "the sticker price." Among the options being considered is whether to instead buy an existing refinery to upgrade the bitumen into higher quality oil.
"These are certainly turbulent times," Brenneman told analysts in a conference call. "An economic slowdown seems likely."
UTS Energy estimated deferring the upgrader would cut costs of Fort Hills by about half, to the $13-billion to $15-billion range.
Petro-Canada, the country's third-largest oil company, said in September that costs at Fort Hills, about 90 kilometres north of Fort McMurray, had ballooned between 50 per cent and 60 per cent to more than $23 billion through the last year.
Brenneman said the mining portion of Fort Hills has to start producing bitumen by the end of 2011 or the partners lose the lease. He said there have been no discussions with the Alberta government about changing those terms.
Under current plans, the mine would produce 160,000 barrels a day of bitumen. Equipment that has been pre-ordered for the upgrader could be stored until a later date, Brenneman said.
Meanwhile, Suncor announced Friday it has approved a $6-billion capital spending plan for 2009. About $3.6 billion is targeted to Suncor's Voyageur oilsands growth strategy.
"Following a thorough review in light of current financial market conditions, we've modified our capital plans for 2009, reducing targeted spending by more than a third," said Rick George, president and chief executive officer.
"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."
Ron Stevens, deputy premier and minister of international and intergovernmental relations, said such projects tend to come online over a long period of time.
"Companies are going to be reassessing their plans for the future based on current economic situations," he said.
Asked what harm taking away $6 billion to $10 billion in investment would do to the economy, Stevens said: "There's about $170 billion worth of projects that had been announced over the next three-year period. If they don't proceed ... they are jobs that otherwise would be there that aren't. To my knowledge, people are pretty much fully employed up in that part of the world in this particular point in time."
Suncor will go ahead with the third and fourth stages of the company's Firebag in-situ operations, part of the $20.6-billion Voyageur strategy. But it will "scale down spending and the pace of construction" on the company's planned Voyageur upgrader, delaying targeted completion by a year to sometime in 2012.
Suncor could also hold back future expansion plans at its Firebag in-situ operations if the credit crisis and slumping oil prices continue.
Chief executive Rick George said in a conference call Thursday that if oil prices hover between $65 and $70 US per barrel, and credit markets remain frozen, "you drop (expansion stages) 5 (and) 6 (for the Firebag bitumen production project) if you have to, and the upgrader if you have to. You can (drop spending) right down to $2 billion needed for the basic business."
This, however, would represent an extreme situation. George said the company is not mothballing its expansion plans.
© The Edmonton Journal 2008

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