Credit Crunch Damages Oil Sands

Two of Canada's largest energy projects have been delayed by the full force of the global financial crisis which has finally hit the oil sands, delaying and tempering Alberta's economic boom.

Uncertainty over oil prices and credit availability means that Suncor Energy Inc. said yesterday that it is slashing its expected spending in 2009 by one-third.

Part of the reduction will affect the $20.6-billion Voyageur oil sands project the company is developing, meaning its upgrader will be delayed by one year.

Meanwhile, the consortium behind the $23.8-billion Fort Hills project, led by Petro-Canada, said it could also delay building its planned upgrader, instead constructing only its planned oil sands mine in order to get crude to market more quickly and cheaply.

The announcements mean that the upgraders at two of the most expensive energy projects ever proposed in Canada now face delays because of the financial crisis, which has sent oil prices plummeting and made credit harder to find.

Upgraders are expensive processing facilities that turn oil sands bitumen crude into a lighter synthetic product that can be handled by more refineries. Alberta is keen to ensure that they are built within the province so that it, rather than the U.S., benefits from the lucrative work through the creation of jobs and extra income.

The announcements come after other companies, including the Nexen Inc.-OPTI Canada partnership and privately held BA Energy Inc., announced delays at smaller projects in recent weeks.

The sudden rash of postponements signals a potential end to Alberta's cycle of spiralling costs caused by worker and material scarcity, which has forced the price of new projects through the roof and crippled regional productivity.

"The pendulum is swinging," Suncor chief executive officer Rick George said in a conference call. "It's not a bust cycle ... but there's a levelling out of capital spending, making [costs] more reasonable for everybody. Manpower will be available at a cheaper cost in six months than today."

Suncor had previously planned to spend $10-billion in 2009, but will now spend only $6-billion, financed from the company's cash flow rather than from debt markets. The bulk of the spending cuts will fall on Voyageur, meaning that the project's upgrader will now be finished in 2013, not 2012. Voyageur will nearly double Suncor's output to 550,000 barrels a day when complete.

"What we're doing is announcing a change in how we execute this project - we're not mothballing it, we're not stopping it," Mr. George said.

Oil prices have fallen by more than half since hitting $147 (U.S.) a barrel in early July, affecting the economics of integrated oil sands projects that include upgraders, which require long-term prices of around $85 a barrel or more to provide a solid rate of return.

Not only do upgraders cost billions of dollars to build, but the price difference between bitumen and synthetic crude has narrowed because of higher North American demand for heavy crude, leaving less value for the facilities to capture.

That's causing problems for developers such as the Fort Hills consortium - Teck Cominco, UTS Energy and project operator Petrocan - which last month announced that the cost of their oil sands project had ballooned by more than 50 per cent in just over a year.

As valuations have fallen amid the financial crisis, the cost of building Fort Hills is now more than the combined $19-billion market value of the consortium partners, forcing them to look at ways to defray the huge capital expenditures. "This is just good management," said FirstEnergy Capital Corp. analyst William Lacey. "The approach [these firms] are now adopting takes some of the strain out of the system and puts more balance into the discussion between corporations and labour."

Author: Jo Amey