Troubled markets may impact oilsands financing
Borrowing costs create roadblock
Shaun Polczer
Calgary Herald with files from Reuters
Saturday, August 11, 2007
Troubled global financial markets threw up additional roadblocks to financing more than $100 billion worth of oilsands projects this week in the form of potentially higher borrowing costs.
Toronto's main index fell nearly 300 points in early trading Friday before recovering to finish 12 points lower at 13,466.28.
Fuelling the volatility were concerns over U.S. subprime mortgages and the spillover effect a meltdown could have on other sectors of the lending market.
According to Mark Freisen, an oilsands analyst at Calgary-based FirstEnergy Capital Corp., borrowing typically makes up more than half of the capital requirements needed to build massive new oilsands projects. "They all use significant amounts of debt," he said. "It's often a big component of the financing for these kinds of projects."
Although the full impact of the subprime woes has yet to be felt, higher interest charges could potentially add another layer of inflation to a sector of the oil industry already reeling from large capital cost overruns.
But Freisen said the reverse could also be true, where oilsands projects are seen as less risky compared to other capital-intensive investments.
"It could make the credit market more difficult," he explained. "But to put a silver lining on it, a good quality long-term asset like the oilsands might be seen as a safer place to be."
Rob Pearce, president and CEO of Northwest Upgrading Inc., plans to raise more than $1 billion to finance the construction of a new heavy oil upgrader near Edmonton.
Pearce acknowledged a potential "spillover effect," but remained confident his company will be able to find the cash it needs to bring the upgrader on stream by 2010.
"We have a large need for capital . . . and our financing plans have a significant debt component," he said. "But it's still a good borrowing environment and it still makes sense for these types of projects. These are very long-term assets and I think (the lenders will) take comfort in that."
Likewise, Marshall McRae, CCS Income Trust's chief financial officer, said the sub-prime woes would not jeopardize the company's $3.5-billion privatization announced at the end of June. That's because the $1.9-billion debt portion was firmly committed before the deal was made public.
However, McRae admitted that the plan might not have gone ahead if it were announced today.
"My understanding is that it's become difficult to put this type of transaction together because of the troubles in the debt market," he said.
Meanwhile, the contagion caused by the growing number of defaults on high-risk mortgages rippled through oil markets as governments from Europe to Japan raced to inject liquidity into the global financial system.
Central banks worldwide have injected at least $323 billion over the last 48 hours into capital markets rocked by problems at banks and funds exposed to bad loans in the U.S. mortgage sector.
The subprime crisis weighed on oil prices Friday, but declines were limited as market fundamentals overcame early losses.
New York crude fell to
$70.10 US, before rebounding to $71.47, about 10 per cent off last week's record high of $78.77. London Brent crude was down 49 cents at $69.72, off lows of $68.95.
"I suspect the speculative interests are moving to the sidelines, raising cash and attempting to avoid risk," said Mike Fitzpatrick, vice-president at MF Global.
Selling in oil has been orderly in contrast to the volatile swings in other markets and futures positions have not been cut dramatically.
"At this stage, the recent drop is viewed by some as a classic correction in a bull market," said Addison Armstrong, analyst at TFS Energy in Stamford, Conn.
Expectations that oil demand would remain robust have helped to put a floor under oil prices. The International Energy Agency said Friday world oil demand will grow at a faster pace in 2008 than this year and repeated its call for more OPEC oil.
China's imports surged 39 per cent in July versus the year-ago period, according to customs data, the fastest pace since January 2006.
OPEC has rejected calls from the IEA and oil importing nations to increase production, noting that oil inventories in consuming nations remain high.
spolczer@theherald.canwest.com
© The Calgary Herald 2007
