Marty Giles is shrugging off oil’s deep slide.
Despite plunging world and U.S. crude prices, the owner of Northstar Ford Group is forging ahead with plans for a $54-million dealership in Fort McMurray, Alta., confident that oil sands growth will help buoy sales of new trucks.
“We’re still building,” he said, comparing the 56,000-square-foot facility under construction to a high-end BMW or Lexus dealership. “We’re not going to be Chicken Little and say the sky is falling.”
Oil sands executives might concur. As North American and global crude oil prices hit the skids, falling this week to four-year lows, producers in northern Alberta are benefiting from strengthening prices for Western Canada Select (WCS) heavy oil and a weaker Canadian dollar. That should buoy returns and keep production growing at a steady clip, analysts say, although newer projects remain challenged by high costs and potentially slimmer margins.
“We don’t see any impact” on existing oil sands production from falling prices, said Mark Oberstoetter, analyst at Wood Mackenzie in Calgary.
“You’d have to see a massive dip in prices for it to go in to shut-down mode.”
U.S. crude for December delivery on Tuesday rose 0.5 per cent in New York trading to close at $81.42 a barrel, after plunging below $80 earlier in the week. Brent, the global benchmark, climbed 20 cents to $86.03 a barrel.
The Canadian dollar fetched 89.5 U.S. cents, a boon for Alberta’s oil sector because companies are paid in U.S. dollars. Meanwhile, WCS for December delivery on Tuesday sold for $14.10 less than West Texas intermediate oil, broker Net Energy Inc. said, amid expectations that new pipelines would help alleviate export jams. That compares to a differential of more than $40 in recent years.
The deep discounts on oil sands crude have pinched high-cost players and forced project delays such as Statoil ASA’s decision to shelve its steam-driven Corner project. Larger companies with deeper pockets are increasingly focused on projects that offer strong returns at a lower cost, Mr. Oberstoetter said.
Companies have “already been correcting some of their long term plans, so I think we’ve already seen some of the headline delays that you maybe would anticipate” from lower prices, he said.
After cancelling its $11.6-billion (Canadian) Voyageur upgrader with Total SA, for example, Suncor Energy Inc. now expects to squeeze about 100,000 barrels per day of extra production from existing assets at a fraction of the cost of building a new oil sands project. To keep construction costs low at its planned $13.5-billion Fort Hills mine, the Calgary-based company has also shifted project fabrication work to South Korea.
Goldman Sachs this week forecast U.S. benchmark crude would average $75 a barrel in the second half of 2015, rising to $80 in 2016.
A sustained dip in that range is more likely to crimp upstart oil sands companies seeking financing for new projects as opposed to established players that generate enough cash to fund future growth, said Michelle Dathorne, senior credit analyst with Standard & Poor’s in Toronto.
The credit rating agency on Tuesday singled out Southern Pacific Resources Corp. and Connacher Oil and Gas Ltd. as being particularly vulnerable at lower oil prices.
“I think they would likely be challenged in a crude oil price environment that had WTI sustained near $80,” Ms. Dathorne said.
In Fort McMurray, Mr. Giles is pressing ahead with construction on his fourth Alberta dealership. Like oil sands companies with huge sunk costs, he’s got no choice. “What am I going to do, sit with a $22-million building that doesn’t have any walls in it and just wait another couple of years? You can’t do that,” he said.
“The oil sands plants are the same way.”Report Typo/Error