Oil Sand Projects Affected by Financial Misery

Alberta oil sands processing projects are being threatened by the global financial crisis, as tighter credit lines and lower oil prices cause companies to look for cheaper alternatives.

Most at risk are upgraders, the sprawling facilities where heavy crude, or bitumen, is processed into a lighter synthetic product that can be handled by more refineries.

Upgraders can cost up to $12-billion. Financing woes aren't the only roadblock: The price difference between bitumen and synthetic crude has narrowed, leaving less value for upgraders to capture.

While North American demand for heavy crude has increased as refiners seek to take advantage of Canadian supplies, oil sands production has lagged expectations.

But some plans may be revised. One company, privately-held BA Energy Inc., has already pushed back its proposed $5-billion upgrader, arguing it's too expensive to raise money now and that market fundamentals don't support the project at this point. Others could follow suit, meaning that processing work that would have taken place in Alberta is instead carried out by refiners in the United States and many of the economic benefits of oil sands development - including well-paid jobs - would migrate south.

"Today's financial environment is very difficult," said Columba Yeung, chief executive officer of Value Creation Inc., BA Energy's parent company. "The oil price is still quite strong but the differentials [between bitumen and synthetic crude] are low. That's discouraging people from considering upgrading."

Value Creation hasn't shelved the BA Energy upgrader, but it will prioritize the development of its oil sands steam extraction project, bringing bitumen production on stream first. It will still look to build its upgrader and is seeking a partner, but the project could be delayed for between 18 months and three years, Dr. Yeung said.

Other companies are feeling the pinch too: Last month, the partners behind the Fort Hills mine and upgrader said the project would now cost as much as $23.8-billion, more than 50 per cent over previous estimates. The consortium says it is now looking at retooling the project.

"It's pretty tough to justify building an upgrader in Alberta today ... when the bitumen price and the capital costs are so high," said Justin Bouchard, a Calgary-based analyst with Raymond James.

Instead of building an upgrader such as at Fort Hills, which needs an oil price of around $90 a barrel to create returns, the returns are better if companies find a U.S. refining partner to take their bitumen production, he added.

But even companies with a U.S. outlet are facing the same pricing pressures. "[The situation] does appear more fragile, based on cancellations, suspensions, [new] cost estimates and a very shaky capital and credit market," said Richard Gusella, CEO of Connacher Oil and Gas Ltd., which yesterday cancelled plans to expand its small refinery in Montana.

Author: Jo Amey