Suncor Slows Oil-Sands Project, Others May Follow

MOSCOW (Dow Jones Newswires), May 28, 2008

Suncor Energy Inc. said Thursday it would delay a key expansion project, the first confirmation of cutbacks in Canada's oil sands due to financial market stresses and plummeting crude-oil prices.

Canada's second-biggest oil-sands producer said it would push back by one year the startup of a facility, known as an upgrader, that would turn tar-like bitumen into high-quality crude oil. The delay to the C$20.6 billion ($16.5 billion) Voyageur expansion project potentially may result in slower-than-planned oil output growth.

Meanwhile, Petro-Canada hinted it also would postpone indefinitely the upgrader for its Fort Hills development after estimated costs recently jumped 50%.

Buoyed by the extraordinary rally in crude-oil prices over the past few years, multibillion-dollar pricetags have become common in Alberta's oil sands as major companies flocked to exploit the biggest crude reserve outside Saudi Arabia. But after cresting near $150 a barrel three months ago, oil prices have plunged to below $70 - well beneath the level that supports new oil-sands developments. The nosedive in global equity markets and the frozen liquidity have added to the sector's woes.

Analysts have warned this combination will likely spark delays or cancellations, and even the Organization of Petroleum Exporting Countries has chimed in. At a press conference ahead of Friday's hastily convened meeting in Vienna, the cartel's president, Chakib Khelil, reckoned costly developments such as oil sands need crude to be priced above $90 a barrel to proceed, adding that the banking crisis is already forcing many companies to axe projects.

With other delays expected to follow Suncor's announcement, oil-sands output forecasts could be lowered once more, further curtailing the amount of crude that had been intended for the U.S. and undermining Canada's appeal as an alternative to Middle East crude.

Fort Hills Next?

Other companies have indicated that delays could be in the cards. The strongest signal is from Petro-Canada and its minority partners in the Fort Hills project -- UTS Energy Corp. and Teck Cominco Ltd. -- following the jump in costs, which could now top C$28 billion.

They still intend to keep the original schedule for the oil-sands mine to start producing raw bitumen in 2011. But holding off on building the upgrader could halve the revised costs, according to UTS, which would be the biggest beneficiary of the move.

The tiny would-be oil-sands developer has been battered by investors, shedding three-quarters of its market value as doubts grew about its ability to finance its share of the project. Delaying the upgrader would cut its immediate funding needs to around C$1.5 billion from C$4 billion.

"Reading between the lines, I think (delaying the upgrader) is the solution that's coming to the top of the pile," said Chris Feltin, vice-president and director of institutional research at Tristone Capital Corp.

Together with the upgrader, Fort Hills would need oil prices to be above $100 a barrel, Feltin said, so sticking to the original design would "implicitly suggest they believe in a long-term oil price at that level."

Earlier this week, Nexen Inc. said it would push back a decision to expand its Long Lake project to next year as it rides out the market volatility. The project, whose first stage officially started up Thursday, is a joint venture with OPTI Canada Inc.

Analysts have also speculated Canadian Natural Resources Ltd. could do the same for future development phases of its Horizon project, which is expected to start up by the end of the year.

Delays, Not Cancellations

But all of these are potential delays, not cancellations. Suncor is still aiming to nearly double output to 550,000 barrels a day to become Canada's biggest oil-sands producer; it just won't reach this in 2012 as originally planned.

By deferring near-term costs, the company has slashed a third off its 2009 spending requirements to C$6 billion.

"Given the current situation in the financial markets, what we're doing is announcing a change in how we execute this project - we're not mothballing it, we're not stopping it," Suncor President and Chief Executive Rick George said during a conference call Thursday. "If conditions improve, we have the flexibility to bring in bitumen quicker."

Current industry forecasts see oil sands output more than doubling to 2.8 million barrels a day in 2015, but this is more modest than last year's forecasts, as regulatory delays and vague environmental rules take their toll. The Canadian Association of Petroleum Producers, an industry lobbying group, publishes the widely watched annual forecasts.

"We've already taken some of those (expected delays) into account," said Greg Stringham, CAPP's vice president of markets and fiscal policy. "We'll have to wait and go through all the announcements to see which ones we had accounted for."

CAPP will have a better idea if this year's numbers will be scaled back again "at the beginning of the December timeframe," Stringham added.  

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