Thursday, November 13, 2008 5:12 PM
Oil sands thick with Fort Hills rumours
Andrew Willis
The oil sands are thick with rumours Thursday of a massive but logical shakeup on the $23-billion Fort Hills project.
The latest line of speculation on development of a property that's seen its potential budget explode has Petro-Canada taking over minority partner UTS Energy.
Petrocan and the other partner in Fort Hills, Teck, would move forward with a scaled-back version of the project. The two companies would focus on extracting bitumen. Here's where things start lining up behind the biggest players in the oil sands, a development that seems inevitable.
The rumour mill has Petrocan and Teck cutting a deal to have the bitumen they produce upgraded by Suncor Energy, at a partly completed facility named Firebag.
Investment banks in Calgary say this detailed, and very sensible line of speculation started in the oil patch engineering community. To give some sense of the credibility attached to the concept, one dealer is circulating a Power Point presentation of how all the parts fit together.
The advantages to the different players break down this way:
- UTS gets put out of its misery. The junior energy company just can't access the capital it needs to fund development of its 20 per cent stake in Fort Hills.
- Petrocan and Teck cut their capital spending, no small issue for debt-heavy Teck, and welcome a new partner with an upgrader that's ready to go.
- Suncor gets a supply of bitumen that justifies the cost of completing work on much of the Firebag facility. Sources in the dealer community say Suncor will not proceed with what's known as phase 5 and 6 of Firebag, which would reduce capital spending by about $4-billion.
Now, here's a bit of background to all this speculation: UTS said two weeks ago the Fort Hills group may defer any decision to build a planned upgrader because of “costs, current commodity, equity and credit market conditions.”
Instead, Petrocan, Teck and UTS said they may proceed only with the mining and extraction portion of the development. UTS estimated the cost of that scaled-back project at $13-billion to $15-billion.
Suncor cut its capital spending budget last month by a third, to $6-billion annually, which makes the more modest plan for Firebag and the need for new allies more likely. Suncor and rivals such as Nexen and OPTI Canada have all announced plans to delay, or postponed the construction of new oil sands upgraders, saying the projects are too costly in the current environment.
A UTS takeover is relatively easy for Petrocan to contemplate, because as the cost of Fort Hills soared, and crude prices fell, UTS stock tanked. Shares are down 84 per cent over the past year, and the company now has a $426-million market capitalization.
At the moment, Petrocan holds a 60 per cent stake in Fort Hills, while Teck and UTS each hold 20 per cent. Suncor is one of the largest and most established players in the oil sands, and has a $22.6-billion market capitalization. Petrocan has a $12.6-billion market cap.
