Cool-down period for oilsands is hardly a crisis
Many industry executives privately relieved by slowdown in overheated sector
Gary Lamphier
The Edmonton Journal
Thursday, October 30, 2008
EDMONTON - It's been fashionable of late for the national media to write off Alberta's oilsands -- yesterday's favourite frontier boom story -- as just another bit of roadkill on the Superhighway to Economic Armageddon.
With key players like Suncor and Petro-Canada recently delaying big spending decisions on future oilsands projects, the casual observer in Ontario or B.C. might well assume Alberta's bitumen boom has gone kablooey.
Perhaps that's the whole idea, I don't know. It's certainly one way to keep your workers from moving to Oilberta. But nothing could be further from the truth.
As Scotiabank commodity guru Patricia Mohr sees it, oil prices have already bottomed, and will likely rebound to the $80 US range by late 2009. That should be robust enough to support the build-out of most oilsands projects.
Let's be clear. With the U.S. economy heading into the tank, and oil prices down 54 per cent from their July high of $147.27 US, the oilsands are clearly in slower growth mode. No question. But they're hardly in crisis.
The oil and gas industry has always been cyclical. Most industry execs anticipated a slowdown, and many are privately relieved it's here. Only fools and cheerleading speculators dreamed oil prices would hit $200 a barrel. Now that speculators have fled the commodities markets, sanity has returned.
In any case, after years of overheated expansion, huge budget overruns, chronic labour shortages, skyrocketing material costs and stubborn infra-structure challenges, the oilsands needed a cool-down period. Now it's here.
By stretching out construction schedules, this will help bring inflation down, and ease the pressure on suppliers, workers -- and the environment. Emissions growth will slow, and Alberta's proposed $2-billion carbon capture system will have more time to roll out properly, alongside new projects.
Sorry, but tell me again. What's the downside here? I don't see it.
By the way, there's no need to worry about the financial health of "legacy" oilsands producers like Imperial, Syncrude and Suncor. They won't be passing the hat anytime soon, trust me.
Even before Wednesday's sharp rally in oil prices, which pushed crude for December delivery up more than seven per cent to $67.50 US a barrel ($82.68 Cdn), they still boasted fat profit margins.
Calgary-based FirstEnergy Capital pegs cash costs for Imperial's in-situ Cold Lake operation at just $30 (Cdn) a barrel. At Syncrude's mines, it's $43 a barrel. And both these estimates include royalty payments.
Newer projects won't be as profitable, but they're still well into the gravy. The first phase of Canadian Natural Resources' new Horizon project, due onstream next month, should generate positive free cash flow at just $40 US a barrel, says UBS Investment Research analyst Andrew Potter.
At $60 a barrel, Horizon 1 should generate an internal rate of return of 12.5 per cent. At $100 a barrel, that soars to 17 per cent.
Likewise, Nexen/OPTI's Long Lake 1 project, which should start producing its first oil in a few weeks, should generate positive free cash flow at $30 US a barrel, Potter says. At $60, the internal rate of return hits 10 per cent.
EnCana's SAGD (steam-assisted gravity drainage) projects at Foster Creek and Christina Lake also boast robust economics, says Potter, as does Husky's Sunrise SAGD project.
Sure, the economics for new, fully integrated -- mine and upgrader --greenfield projects like Petro-Canada's $24-billion Fort Hills mega-monster are dicey at the moment. No surprise there.
Credit remains tight, and with markets gyrating wildly, Petro-Canada and its partners would be courting disaster to proceed in this environment. But Fort Hills will surely resurface once oil prices rebound, as they will. And it will be cheaper to build in a couple of years than it was during the boom years.
Meanwhile, China, India and other emerging economies will continue to grow. Their energy demands will expand as well. The tightness in world oil markets will return, once the current economic problems subside.
In fact, for those who can see beyond the next week, month or quarter, it's abundantly clear that the seeds of tighter oil markets tomorrow are already being sewn today. As new oilsands projects and other new supply around the world gets delayed, it will only accelerate the process.
"In fact, OPEC recognized that at their last meeting. They said they felt it was important to try and shore up prices because they were afraid of project cancellations. So basically, in the medium term, supplies might become quite short again," says Mohr.
Although she admits the furious pace of the decline in prices for oil, base metals and other commodities caught her by surprise, she remains convinced that the long-term trend in prices remains up, not down.
"What I see is continued growth in emerging markets. Even though people are very negative about global growth at the moment, I still think China will grow at a reasonable (8.3-per-cent) pace next year. And once we get out about 18 months, I think commodity prices could well start to lift again."
glamphier@thejournal.canwest.com
© The Edmonton Journal 2008
