CANADIAN TAR SANDS DISASTER
May 27, 2003, 1400 PDT (FTW)
-- For all the people touting tar sands
as a solution to the pending apocalypse of Peak Oil, a
little experience with reality should help them understand
that the books on energy are as cooked as the books of
Enron, WorldCom and Halliburton. When business tells you
there's plenty of oil it is only to protect the financial
markets. One more time Canada gets screwed as tar sands
oil production proves to be a non-cost effective and environmentally
- From The Wilderness
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Abstract: Petro-Canada's review of its multibillion-dollar
oilsands strategy is the latest setback for Canada's
unconventional oil sector, a pattern that holds implications
for the U.S.
politicians and consumers.
Analysis: The biggest threat to U.S. energy security is
not Al Qaeda terrorists but spiraling construction costs
for oilsands projects in northern Alberta.
Activities in the forests and swamps
surrounding Fort McMurray are a long way from the minds
of American politicians
and consumers. But this week’s decision by Petro-Canada
to hit the pause button on its multibillion-dollar oilsands
strategy should cause U.S. energy players to pay attention
to the remote region.
According to Energy Information Administration data, Canada
provides about nine percent of daily U.S. crude supply.
Canada competes intensely with Saudi Arabia, Mexico, and
Venezuela for bragging rights as the top supplier of crude
(excluding refined products, which pushes Canada to the
top of the list) to the U.S.
Higher exports from this country have been based largely
on increased production from crude extracted from a sticky
mixture of sand and oil buried in the northeastern corner
Oil shipments to the U.S. from Canada have averaged about
1.5 million barrels a day (mmbbls/d) this year, compared
with 1.2 million averaged throughout 1999.
The surge is due largely to Suncor Energy Inc., Syncrude
Canada Ltd. (a consortium of eight owners), Shell Canada
Ltd., and other firms pouring billions of dollars into
developing the oilsands. The unconventional resource is
estimated to hold more than 300 bbbls of recoverable oil,
making it a world-class play.
While the spending bubble has lifted
for the past five years, a pin was firmly inserted into
the sector by Petro-Canada’s decision to reconsider
its oilsands plans in light of rising costs.
At its annual meeting earlier this week, the Calgary-headquartered
producer said it will reduce spending by two-thirds, a
cut of C$120 million, on detailed engineering on what was
supposed to be a C$5 billion upgrade to its refinery near
"We are going to take the time between now and the
fourth quarter to try to see if there aren't some better
options for us to pursue that are more economic than the
course that we were on up until today," Petro-Canada
chief executive Ron Brenneman told reporters after meeting.
In late 2001, Petro-Canada launched an ambitious plan
to enable its Strathcona refinery to use bitumen, an extra-heavy
crude derived from the oilsands, instead of light oil.
The first stage, estimated to cost between C$2.4 billion
and C$2.8 billion, was scheduled to allow one processing
train to use 85,000 bbls/d of bitumen by 2007. A second
phase, with a similar price tag, was expected to double
production by 2010.
Petro-Canada also planned to spend C$800 million developing
Meadow Creek south of Fort McMurray, a city of 35,000 people
that acts as the hub for oilsands projects. Meadow Creek
was supposed to help supply the Strathcona refinery by
producing up to 80,000 bbls/d of bitumen for 25 years starting
As so many other companies operating
in northern Alberta have discovered, there’s a
huge difference between a pretty presentation in a conference
hall and bulldozers
churning in the mud. It smacked Petro-Canada harder than
a stadium-clearing homer swatted by Barry Bonds.
Suncor endured the costs of its
Millennium project, soaring 70 percent to C$3.4 billion
from its original estimate
of C$2 billion. The price elevator for Shell didn’t
stop rising until the bills hit C$5.7 billion, up 50 percent
from the initial target of C$3.8 billion. Syncrude is trying
to pare the costs of its latest expansion, called Phase
3, from C$5.6 billion to something closer to the original
target of C$4.1 billion.
Brenneman said his firm’s
increases were greater than 50 percent, although he did
not provide a specific
figure. This means the combined price for refinery revamp
and Meadow Creek is near C$8.4 billion, dramatically changing
"It was only in the last month or so ... that the
numbers started to pop up and that's when the alarm bells
went off," he told analysts during a conference call.
Higher costs for labor and material plus reduced productivity
from skilled staff spread thin by the boom were prime reasons
for the headache-inducing budget changes, the executive
The announcement by Petro-Canada landed like the initial
wave of cruise missiles on Baghdad at the start of the
war--it was completely unexpected. However, the decision
was consistent with the past behavior of Brenneman, a former
ExxonMobil executive who has installed a rigorous focus
on capital discipline since taking over in January 2000.
Besides pausing on the oilsands, Petro-Canada is also
looking at international investment opportunities, including
Iraq. The review is scheduled to be finished by the end
of the year.
Brenneman said the two initiatives
were separate, but it makes sense for more lucrative
to move up the company’s agenda at the expense of
capital-intensive oilsands projects with low returns. It’s
a logical move that would be supported by analysts and
Petro-Canada’s decision, while not final, marks
the latest in a series of setbacks for Alberta’s
oilsands, a trend which should concern U.S. policy-makers
TrueNorth Energy Corp., a subsidiary of Wichita-based
Koch Industries, delayed its Fort Hills project earlier
this year indefinitely after capital costs rose by C$1
billion to C$3.3 billion. TrueNorth planned to produce
95,000 bbls/d of bitumen by 2005, with expectations of
doubling output by 2009.
Canadian Natural Resources Ltd. has pushed back by one
year its massive Horizon project, meaning it will not start
producing 110,000 bbls/d of bitumen until 2008 at the earliest.
The multi-stage development is expected to pump 232,000
bbls/d of bitumen by 2012.
The toppling dominoes deserve some attention from the
administration of President George W. Bush. Each delayed
or cancelled oilsands project here means more dependence
on Russia, Mexico, or OPEC members, increasing the possibility
of disruptions because of political unrest or terrorist
Crude exports to the U.S. from Venezuela, which dropped
to around 500,000 bbls/d in the first two months of this
year from 1.2 million bbls/d in the same period of 2002,
demonstrate the rollercoaster-like ride that makes the
industry so difficult to predict.
While Canada is far from perfect, common business practices,
buried pipelines, and provisions in the North American
Free Trade Agreement that govern energy mean this country
is the most secure source of oil for the U.S.
The importance of reliable supply is only going to increase
in the future as U.S. domestic production continues to
decline. Volatility in supply, evidenced by what happened
this winter to gasoline and home fuel bills, translates
into higher prices and increased unhappiness among voters,
a bad combination for politicians.
The options available to U.S. government
are quite limited. It can’t, for example, do much
to influence the number of pipefitters and millwrights
willing to work in the bush
of northern Alberta.
With the House and Senate trying
to hammer out a new energy policy, the assumption of
growing crude production from
Canada needs to be questioned. It’s no longer a slam-dunk,
and a reduction in oilsands output could have long-term
impacts on U.S. foreign policy.
President Bush, known for his religious faith, should
be praying nightly that Petro-Canada and other oilsands
players find ways to cut their costs and boost U.S. energy
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