Tuesday, January 27, 2009

Oil Sands Group's Forecast too rosy.

This is from the Financial Post.

It remains to be seen how much longer oil prices will remain low. Of course for many of the oil sands producers oil must be far above present levels to be economic so the prospect for lower production and investment seems likely in the shorter run at least. In the longer run there is just not that much new oil available and supplies are going to not match demand once demand begins to increase. We could even seen another price bubble during the turnaround.

Tuesday, January 27, 2009
Oil sands group's forecast is too rosy
But investing in sector should pay in the long run
Wilf Gobert, Financial Post Published: Tuesday, January 27, 2009
Economic activity is slowing dramatically around the world. Analysts are rerunning financial models more frequently and every iteration produces a weaker result. These conditions are especially true for energy analysts, given the dramatic weakness in crude oil and natural gas prices. As oil sands investments are said to be the economic engine of Alberta, if not of Canada, then related recent news is shocking to investors and governments.
Highlighting the rapidly changing outlook for energy investment generally -- and oil sands in particular -- is the contrast in January reports from two oil sands entities.
The Oil Sands Developers Group (OSDG) is a non-profit, industry-funded association of oil sands project owners based in Fort McMurray. In a presentation delivered on Jan. 14, OSDG had graphs of updated forecasts as of December, 2008 vs. January, 2008, of oil sands production and expenditures for the three-year period 2008 through 2010.
The forecast of bitumen production (low gravity crude oil) for the period is little changed from the forecast from one year ago. This is surprising given capital spending forecasts by major oil companies.
However, part of the reason is that most oil sands production is from surface mining operations like Suncor's and so is near-term growth, which comes primarily from Canadian Natural Resources' newly producing Horizon project and capacity expansion of a Suncor upgrader.
Over the longer term, growth in oil sands production will yield to in-situ production, which pumps the bitumen from zones too deep for surface mining. In-situ oil sands represent 80% of Alberta's total resource.
Their forecast calls for production to grow from 1.5 million barrels per day in 2008, to 2.0 million barrels per day in 2010. These forecasts will certainly need to be revised downward. Keep in mind that processing of bitumen into light crude oil results in approximately a 15% reduction in volume.
Following from OSDG's production forecast, operating expenditures are projected to grow by a similar magnitude as production, from $14-billion in 2008 to $18-billion in 2010. Again, this is a forecast that must shrink under future revisions but maybe not dramatically given surface mining activity.
Where the OSDG's crystal ball breaks down is its forecast of capital expenditures for oil sands. They project a modest decline in 2009 to $12-billion from $14-billion in 2008, and then growth in 2010 to over
$15-billion. While the latter amount is a huge decline from the earlier forecast of $32-billion in 2010, the forecast is still too optimistic given the magnitude of Suncor Energy's latest budget.
Last week, Suncor reported fourth-quarter results to shareholders and revised downward for the second time in three months its capital spending plan for 2009.
Last summer, with oil at a record US$147, investors were projecting Suncor's 2009 capital budget to be $9-billion. In late October, Suncor announced that due to weak oil prices, it would scale back its budget to $6.0-billion.
But last week, the promising growth outlook for oil sands activity began to implode with Suncor's further budget cut of 50% to $3.0-billion and the shocking decision to halt construction of the $20.6-billion Voyager project.
At the end of 2008, $7.0-billion had already been invested in this project. The original start-up date for Voyager was the end of 2011. We hasten to say that the reserves and future production capacity of Suncor's assets have not changed but rather the timing to commercial delivery.
Suncor is the largest oil sands producer in the industry and in many ways the role model for the oil sands industry, both in regard to surface mining and in-situ production. Its decision will reverberate throughout the oilpatch.
One shouldn't jump to the conclusion that investing in oil sands companies should be avoided. The long-term asset value remains enormously attractive for Suncor, Canadian Oil Sands, Canadian Natural, Nexen and others. But short-term forecasts by OSDG, and most importantly, the Alberta government, will need a sharp pencil and frequent revisions if decisions are to remain relevant to the oil price outlook.
-Wilf Gobert is an independent energy analyst based in Calgary and a senior fellow with the Fraser Institute.
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