Oilsands break-even hits $54 per barrel
Project costs up 16 per cent in one year
Ashok Dutta
Calgary Herald
Wednesday, July 04, 2007
The break-even oil price for Alberta's oilsands mining projects has risen an average 16 per cent in the past 12 months -- driven primarily by the high cost of manpower and materials -- a U.S. investment bank said in a report on Tuesday.
"We now think the economic WTI (West Texas Intermediate) break-even for mining projects is about $54 per barrel, up from our previous estimate of $45 last year," said Arlington-based Friedman, Billings, Ramsey Group Inc. "For SAGD (steam-assisted gravity drainage) production, the break-even economics remain better, closer to WTI $30, slightly higher than our previous estimate of $27.50."
Break-even price is a combination of capital costs, along with the cost of servicing the capital.
WTI prices climbed to a new 10-month high of more than $71 per barrel on Tuesday, extending recent gains into a fifth straight session.
"The five-day run-up was fuelled by a combination of technical and fundamental factors, including terror plots in the U.K., falling U.S. petroleum stocks and violence in Nigeria," said the New York Mercantile Exchange daily bulletin. "NYMEX August crude traded 30 cents higher on Tuesday at $71.30."
The past several months have seen some of the province's best known oilsands operators dealing with rising costs. The latest was on June 28, when Petro-Canada unveiled an estimated $14-billion investment for the first phase of its Fort Hills project to include a 160,000-barrel-per-day mining facility.
The planned expenditure was calculated on a base oil price of $45 per barrel.
The FBR report was silent on cost escalations for upgraders, but senior analyst Mark Friesen of FirstEnergy Capital said it constitutes about 45 per cent of an integrated oilsands venture.
"They (upgraders) are long-lead projects and require a great deal of front-end loading and engineering work," said oil and gas equity analyst Justin Bouchard of Raymond James. "Some estimates were done three years ago, but things have changed lots since."
Maroof Shah, managing director of Calgary-based Peggy Enterprises Ltd., felt that multibillion dollar hydrocarbon projects in the Middle East and Far East are prime reasons for prices being driven hard.
"Saudi Arabia is further expanding its supremacy as an oil superpower and also emerging as a leading petrochemical producer," Shah said.
"In China, labour costs and productivity are not issues, but they are importing in large numbers speciality process equipment," he said.
Shah was until recently senior adviser to Riyadh-based pertrochemical giant Saudi Basic Industries Corp. and helped in setting up procedures for best practices.
Rising capital costs may eventually lead to further mergers and acquisitions by 2008, the FBR report pointed out.
"The high level of heavy oil-oilsands activity and decreasing natural gas activity reflects 'fuel switching' at the margin. As more oilsands projects get developed, this will cause a structural uplift in Canadian natural gas prices relative to crude oil, which should bring the long-term oil-gas ratio back from over 10 currently, to under six over the next two to three years."
The report added: "Production growth from the oilsands will not be slowed down by economics alone, as much as from labour shortages and productivity issues, project development delays and optimistic timelines for new take away pipeline capacity."
"Oilsands M&A should increase by 2008 and should attract increased activity once current royalty and emission issues are resolved, especially given the reducing economic interest being offered to large IOCs (international oil companies) elsewhere in Venezuela, Russia, higher political risks in Nigeria and Angola and decreasing reserve lives of IOCs and their need to re-leverage balance sheets to obtain optimal equity returns," it said.
On M&A, Robert Plexman, managing director of equity at Toronto-based CIBC World Markets, felt that the Alberta oilsands patch will witness a migration from asset-rich, but financially challenged firms to large oil and gas companies.
"We have recently seen some of that in the Statoil-North American Oil Sands Corp. play," he said.
"The process will continue probably beyond 2008, as it takes about seven years from the concept stage, to go though the regulatory approvals for a take over, construction of facilities and finally produce first oil."
Bouchard felt that an underlying tone at present is for junior oil companies to "hold their breath" and wait for the opportune moment.
"Some IOCs, like BP, ENI and Repsol are notably absent. They are floating around and looking for the right opportunity. A look at the latest oilsands map indicates several companies with small pieces of land. We will see a consolidation," he added.
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