[R-G] Plunge raises fears over oilsands viability

[Anthony Fenton]

Plunge raises fears over oilsands viability
Low prices challenge new projects

Shaun Polczer
Calgary Herald
http://www.canada.com/calgaryherald/news/calgarybusiness/story.html?id=cd79bccc-3fd5-4939-8846-d9b87675cdb2

Saturday, October 11, 2008

Demonstrators "greenwash" oil barrels in Washington on Friday to  
protest World Bank proposals for climate financing.
CREDIT: Tim Sloan, Getty Images
Demonstrators "greenwash" oil barrels in Washington on Friday to  
protest World Bank proposals for climate financing.

Falling commodity prices are starting to threaten the viability of new  
oilsands projects and could confound the long term plans of industry  
heavyweights like EnCana Corp., which announced in May it would split  
itself into two corporations starting in 2009.

Benchmark crude prices fell about 10 per cent in New York on Friday,  
losing more than $8.89 US to close below $80 at $77.70. It was the  
lowest point for oil prices this year and the biggest weekly drop  
since 2003.

As prices continued to fall, demonstrators protested what they see as  
dirty oil outside the World Bank headquarters in Washington, even  
while U.S. President George W. Bush tried to break a cycle of  
"uncertainty and fear" he blamed for worsening the global financial  
meltdown, insisting authorities can and will end the crisis.

Back home, oil prices are reaching the point where they could threaten  
new oilsands projects in northeastern Alberta, experts said.

Justin Bouchard, an oilsands analyst with Raymond James in Calgary,  
said new projects such as Petro-Canada's $21-billion Fort Hills mine  
could be threatened by a combination of skyrocketing costs and lower  
oil prices. "You'd never go ahead with it at $80," Bouchard said. "It  
would be very difficult to imagine sanctioning it today."

Last month Petro-Canada upped its cost estimates for the sprawling  
mining operation by 50 per cent, setting a new benchmark for capital  
intensity at $180,000 per flowing barrel.

The inflated figure prompted UBS analyst Andrew Potter to suggest new  
megaprojects like Fort Hills are out of the money if they need $100  
oil to break even.

"In light of this recent cost increase, we expect that many oil sands  
projects currently being considered may see their capital costs  
revised upward," he noted.

"Furthermore, some projects may be deferred or cancelled while the  
scope of other projects may need to change."

Bob Dunbar, an oilsands expert with Strategy West consultants in  
Calgary, agreed prices have taken a back seat to costs for the past  
few years as developers have struggled with rising prices for labour  
and materials like steel.

He reckoned that Fort Hills would need a sustained price of about $90  
to be considered economic.

Older projects like Suncor's Millennium expansion still continue to  
generate healthy returns at $80 and even newer projects such as  
Canadian Natural Resources' Horizon mine and the OPTI/Nexen Long Lake  
thermal operation are probably resilient to the latest price crunch.

But companies that rely on significant outside funding sources without  
internally generated revenue are in trouble.

Big multinationals such as Total and StatoilHydro have already  
announced delays to the upgrading portions of their respective  
integrated operations, while smaller homegrown outfits like Northwest  
Upgrading and BA Energy have put plans on the back burner.

"We've already seen some individual projects being delayed," Dunbar  
said. "I think we will see some additional delays if lower prices  
persist."

Suncor lost $1.67 on Friday, to close at $26.09. Canadian Natural fell  
$4.81 to $48 while Nexen lost $2.20 to close at $14.01. OPTI Canada  
was one of the TSX's biggest losers Friday, shedding close to 20 per  
cent, to finish at $5.60. The company has lost about three-quarters of  
its value since hitting a 52-week high of $25.40 in June.

Falling commodity prices combined with falling share prices may prompt  
other companies such as EnCana to reconsider restructuring plans after  
2009. In May, the company said it would spin off its heavy oil unit  
into a separate company called Cenovus Energy Inc. while carrying on  
its natural gas business under the name EnCana.

With both oil and gas prices tanking, some analysts said Cenovus would  
quickly become a takeover target once it formally begins operating in  
January.

Natural gas followed oil lower on Friday, losing 66 cents to close at  
$6.86. That sent EnCana's share price to a new year-low of $43.50,  
down about 13 per cent, or $6.39, on the day.

Given the continuing market volatility, the company may have to  
revisit plans if the credit crunch makes raising capital more  
expensive for the smaller companies that will result from the split,  
Phil Skolnick, an analyst with Genuity Capital, told Reuters.

"I'm hearing now that they're talking about it possibly not happening  
because the fear is that the cost of capital of both the companies is  
rising, or it would be higher than the company as a whole," Skolnick  
said.

"As of today, with the way that the credit market is, there's higher  
cost of capital, so why do it? I don't think investors would probably  
vote for it right now if they knew that."

EnCana spokesman Alan Boras was quick to dismiss the speculation. He  
said North America's largest natural gas producer remains  
fundamentally and financially sound and is moving ahead with the split  
as originally envisioned. The company's management is open to all  
options to maximize long-term value, he added.

"We are continuing with plans to create Cenovus," he said. "We  
recognize there's a great deal of volatility and that market  
conditions are markedly different now than they were in May."

According to Raymond James' Bouchard, the falling Canadian dollar is  
helping to offset some of the impact of falling oil prices.

The loonie had its biggest single day drop since 1971 on Friday, the  
sharpest in almost four decades. Costs tend to lag commodity prices, a  
fact that could still favour capital intensive oilsands projects such  
as Fort Hills.

"Capital costs might take six months to a year to come back to an $80  
world," he said. "If that happens, then it changes everything."

Bouchard also said it's not the prevailing price today that matters,  
but where oil prices will be in 2012 and beyond.

"Unlike conventional oil and gas, oilsands is really about your long- 
term view. And we're still really bullish on crude over the long term."

Other big losers in Toronto included Talisman Energy, which lost 79  
cents to finish at $9.89.

spolczer at theherald.canwest.com
© The Calgary Herald 2008