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Oil price drop threatens oilsands megaprojects
News Articles Featured | Calgary Herald | August 09, 2011
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CALGARY — The price of crude slid more than six per cent Monday, dropping to a level experts say makes future oilsands mining projects look unprofitable if it persists.
North American crude prices, pushed down by investors nervous about U.S. and European debt issues and the downgrade of the world’s largest oil-consuming nation by the Standard & Poor’s rating agency last Friday, settled down $5.57 US at $81.31 a barrel for September delivery — at the bottom of the price range oilsands developers eye when planning projects.
Bob Dunbar, president of Calgary oilsands consultancy Strategy West Inc., said if prices for the U.S. benchmark West Texas Intermediate crude continue to hover around $80 a barrel, existing producers will watch cash flow erode — curbing their ability to fund expansions — and planned projects could get delayed or scrapped.
“If, in the long term, people were expecting a sustained period of prices around where we are today, that’s certainly going to impact people’s expansion plans, I would expect,” Dunbar said.
The multibillion-dollar oilsands mining megaprojects — those endeavours heavy on supply-chain co-ordination that can’t be shut on or off on market price fluctuations — depend on a long-term pricing view that’s higher than the in situ steam-assisted gravity drainage (SAGD) projects, Dunbar said.
“For a SAGD project, those projects are probably economic in the $60 to $80 a barrel range,” Dunbar said.
“For a stand-alone mining project, the price threshold is probably higher than that, $80 to $100, and so those are the kind of projects that might be jeopardized if people have a more pessimistic long-term view of prices.”
And exploration and production companies banking on raising money for oilsands projects on markets that have eroded in recent days might find funding is drying up.
“For companies that don’t have existing operations, they might be relying on access to capital markets and capital markets are obviously pretty nervous right now,” Dunbar said.
According to a report Monday by Barclays Capital’s equity research division, exploration and production companies focused on North American projects are assuming a price point well above $80 for West Texas Intermediate crude in their planning.
“North American-levered companies are using average oil prices of $87 for budgets, although almost half are using prices well above $87,” research analyst James West wrote to clients.
Imperial Oil Ltd.’s pricey Kearl oilsands mining project — which has a $10-billion first phase scheduled to start up late next year — will operate for some 40 to 50 years and won’t be affected by near-term fluctuations in oil prices, according to spokesman Pius Rolheiser.
“Kearl is a very long-term project, a project that will come onstream in 2012 and operated for a period of decades after that,” said Rolheiser, who wouldn’t give Imperial’s internal cost thresholds for Kearl because they’re proprietary.
Junior oilsands companies were the biggest losers on stock markets on Monday as the S&P/TSX Energy Index plunged seven per cent, contributing to a four per cent loss on the S&P/TSX composite index, down 491.75 points to 11,670.42. The energy index is down 17 per cent from the beginning of the year.
Shares in BlackPearl Resources, a Calgary-based heavy oil producer working on a thermal pilot project, lost more than a fifth of their value, 21.3 per cent, to close at $4 even.
Petrobank Energy and Resources Ltd. was down 16.3 per cent, MEG Energy Corp. fell 11.5 per cent and Athabasca Oil Sands Corp. was off 10.8 per cent.
Suncor Energy Inc., Canada’s biggest and oldest oilsands player, fell 6.9 per cent, and Canadian Oil Sands Ltd., the largest shareholder in Syncrude Canada, lost 6.6 per cent.
Stephen Jarislowsky, the 85-year-old veteran Canadian investor who runs Montreal-based Jarislowsky Fraser Ltd., said he believes oil prices are poised to fall further on an impending global recession.
“I don’t know how deep it will go or how far but I do know there’s certainly enough oil in the world for the time being,” said Jarislowsky, whose company is the ninth-largest shareholder of Suncor and No. 1 shareholder of Nexen, which has a 7.23 per cent interest in the Syncrude oilsands joint venture and majority stake in the Long Lake oilsands project.
“Therefore we’ll see a very rapid fall in the oil price, which presumably will be overdone at the downside as it was on the upside and hopefully it will settle somewhere in the middle and hopefully it will be at a higher price than the cash cost of operating in the oilsands.”
Jarislowsky, who said he’s less worried about where oil prices go in the short run, wouldn’t reveal his firm’s strategy to cope with the market sell-off.
“Long term, I think oil in the ground is a good asset. Whether it is in the short term, that’s a different matter,” he said.
Alberta Department of Finance and Enterprise puts oilsands megaprojects in the province planned, underway or recently completed as of last November at $112 billion.
Tagged with: syncrude, oil prices, suncor, kearl, petrobank, blackpearl
