Wednesday April 23, 2014



Oilsands Investment Projected To Reach Record Levels In 2012

Canada's oilsands sector -- and indeed, the country's entire oil and gas industry -- is headed for record capital investment in 2012, according to the Canadian Association of Petroleum Producers (CAPP), and data collected by JuneWarren-Nickle's Energy Group.

Capital expenditures on oilsands projects are expected to be $20 billion this year, up from an estimated $19 billion in 2011, which surpassed the previous record of $18.1 billion set in 2008, says CAPP. That compares to oilsands projects' capital expenditures of $13 billion in 2010 and $11 billion in 2009, according to the association.

"I think $20 billion is now a record," says Martyn Griggs, CAPP's manager of oilsands. "It certainly has been climbing since we had the financial downturn in 2007 and 2008. The maximum I ever got to for all of oil and gas including oilsands was $50 billion and for 2012 I'm now showing that number to be $55 billion."

Griggs says the bulk of 2012 oilsands spending will be on established mines, with the exception of Cenovus Energy Inc., which does not have a mine but is expanding at Christina Lake.

Syncrude Canada Ltd. will probably see spending of about $3.5 billion on debottlenecking designed to improve production by 10 per cent, he said. (Syncrude and Royal Dutch Shell plc do not disclose production or spending plans, the DOB was told, however JuneWarren-Nickle's Energy Group records indicate Syncrude will spend $3.75 billion this year with $2.65 billion of that on major projects.)

Suncor Energy Inc. is building Firebag 4 and its Voyageur upgrader, Canadian Natural Resources Limited is expanding its Horizon mine and Imperial Oil Limited is constructing the Kearl mine and the expansion, Griggs noted.

Meanwhile, Total E&P Canada recently received federal approval to start construction on its Joslyn North mine (DOB, Dec. 9, 2011) and he expects spending there of about $1 billion in 2012.

The balance of spending will be on a whole myriad of smaller SAGD projects such as those of MEG Energy Corp., Laricina Energy Ltd. and Osum Oil Sands Corp., he said.

Griggs said he expects spending will be evenly spread throughout the year.

Driving the growth is current oil prices which are currently about $100 per bbl WTI, said Griggs. "This is at a time when we're supposed to be in some kind of recession so I think there's a lot of bullishness out there, that we need production and this is our contribution."

Guy Cocquyt, director of investor relations for Flint Energy Services Ltd., whose major construction division concentrates on building oilsands projects, says industry is better prepared for project construction that lies ahead.

The big difference between the last peak and this one is that the engineering on many projects is complete so the projects' costs have been easier to estimate and their pace might be improved, Cocquyt said. "It's not like a mad scramble; there seems to be a lot more discipline, a lot more thinking about how the project schedules will dovetail. We're very happy with seeing what I would call a more balanced look at how capital spending is coming out this time around."

In 2007-2008, Flint had just under $600 million in revenue and last year that number was about $300 million, said Cocquyt, adding he expects 2011 will be about the same. "That's down from peak but we expect to be back up to peak in 2013-2014 and probably blow through that."

For a long time, companies were spending a lot more time completing their engineering and "they were waiting to pull the trigger," said Cocquyt.

Flint had one customer, Suncor, during most of 2011, performing completion work on Firebag 3 and 4 that is substantially wrapped up. For 2012, it has no mining projects in the hopper but it is ramping up work for MEG's Christina Lake Phase 2 SAGD project, worth about $150 million in field construction, said Cocquyt.

Another SAGD project, owned by a company that does not wish to disclose its name, is to ramp up in the second quarter with around $430 million worth of work for Flint, he added.

Most oilsands construction work this year was on the SAGD side, he said. Asked which companies have been busy with that work, he said, "Everybody. It's very busy."

Mining projects Flint "has its eye on" include Suncor's Fort Hills oilsands mine and the Voyageur and North West Upgrading Inc. upgraders, Cocquyt told the DOB. The company is also bidding on some modular fabrication projects, mostly SAGD-related.

"We think it's going to be very, very busy in 2013 and we expect it will be very close to what we expect the peak to be," he said.

Suncor's plans for 2012 feature $7.5 billion in capital spending with about $3.6 billion -- or nearly half -- directed toward growth projects. About 60 per cent of the growth funding is earmarked for projects at the company's oilsands operations.

With the Firebag Stage 3 expansion project now operational and production continuing to ramp up, the single-largest growth spend in 2012 shifts to the company's Firebag Stage 4 expansion project, which is expected to begin production during the first quarter of 2013. The company also plans to direct growth spending toward the Fort Hills and Joslyn oilsands mining projects and the Voyageur upgrader.

Canadian Natural Resource Limited has approved about $2 billion in expansion of its Horizon oilsands mine, up from $540 million in expected spending for 2011.

The 2012 budget for Horizon consists of: $165 million on Tranche 2 reliability ($275 million in 2011); $215 million on Directive 74 and technology ($45 million in 2011); $345 million on Phase 2A ($125 million in 2011); $720 million on Phase 2B ($35 million in 2011); $475 million on Phase 3 ($45 million in 2011); and $30 million on Phase 4 ($15 million in 2011).

Including funding for sustaining capital, turnarounds, reclamation and capitalized interest, spending on the project in 2012 is expected to total $2.36 billion, up from $880 million in 2011.

While Shell does not disclose production or spending plans, Marathon Oil Corporation has announced plans to spend $275 million on its oilsands mining segment for the initiation of debottlenecking projects, a carbon sequestration project and other capital expenditures at the Shell-owned Athabasca Oil Sands Project, putting total spending on that project of $1.38 billion in 2012.

Imperial's capital and exploration expenditures for 2011 were $4.07 billion, in line with $4.05 billion in 2010 and were focused on advancing the construction of the Kearl oilsands mine but also included additional acreage acquisitions.

Imperial recently said the Kearl initial development is 87 per cent complete, and is progressing on schedule with expected start-up in late 2012 (DOB, Jan. 31, 2012). Planned capital and exploration expenditures are expected to be about $5 billion this year as the company enters the third year of a decade-long strategy to invest about $30 billion to $40 billion in growth projects. CAPP estimates Kearl spending will be $3 billion in 2012.

Husky Energy Inc. is slated to spend $610 million at its planned Sunrise SAGD project and Teck Resources Limited is to spend $220 million at Fort Hills.

On the in situ side, Athabasca Oil Sands Corp.'s $819 million budget (for its 100 per cent-owned assets) features close to $420 million for its oilsands division. The oilsands budget includes $227 million to be invested in the Hangingstone area, with about $150 million spent on Hangingstone 1, its first 12,000 bbls per day SAGD project. Activities include the drilling of 15 observation wells, 50 delineation wells, some water wells and the acquisition of seismic.

Cenovus has budgeted a total of $1.64 billion for in situ capital expenditures this year: $700 million at Foster Creek, $525 million at Christina Lake and $415 million at Narrows Lake, Grand Rapids and Telephone Lake.

According to JuneWarren-Nickle's Energy Group records, capital spending among other in situ players in 2012 is as follows: Connacher Oil and Gas Limited, $20 million; Grizzly Oil Sands Ulc, $124.5 million at Algar Lake; Gulfport Energy Corporation, Grizzly's 25 per cent partner at Algar Lake, is to spend $41.5 million; Harvest Operations Corp., $215 million at its BlackGold project; Husky, $30 million at Tucker; Laricina Energy Ltd., $402.6 million; and MEG Energy, $1.37 billion, mostly on construction of Christina Lake Phase 2B. (Note: Not all producers release spending plans for their projects.)

Nexen Inc. is set to spend $750 million on in situ projects at Hangingstone, Kinosis 2, Long Lake and Kinosis 1A and other non-operated projects.

Petrobank Energy and Resources Ltd. is budgeting $12 million in capital expenditures for Dawson.

PetroChina International Investment Company Limited has reported plans to spend at total of $491.5 million: $22.5 million at Dover, $1.5 million at Grosmont and, before it purchased the remaining 40 per cent of the MacKay River project from Athabasca Oil Sands (DOB, Jan. 3, 2012), $467.5 at MacKay River.

And while CAPP's Griggs says the oilsands spend could be greater, increases will come with additional challenges, particularly around labour.

The unemployment rate in Alberta is currently about 4.9 per cent, which equates to near-full employment, he points out, adding that the oilsands industry is already stretched in some areas such as engineering and trade skills. However, other sectors in the province such as hospitality and agriculture are not yet experiencing the major challenges they did during the last energy boom in 2005-2006.

"If the [capital spend] rate increases significantly, then we could end up being in that same position in the next year or two," Griggs recently told sister publication Oilsands Review. "Are we at the limit of capacity? The oil and gas industry and oilsands in particular will find a way of getting the people it needs, so if the burn rate was to say exceed $20 billion, let's say to $21 billion, that's a five per cent increase.

"You've got to get the people and the materials from somewhere, so you'll probably start looking outside of Alberta. And that's when the inflationary issues will start coming into play because you're trying to bring people in, whether it's from the U.S. or even further afield. I wouldn't say that you've hit a ceiling. There is no ceiling, but it becomes that much more difficult to spend over and above $20-$21 billion in the short term, i.e., the next 10 to 12 months without causing disruption to the broader economy." -- with files from Deborah Jaremko, Oilsands Review





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