Collapsing oil prices could force Suncor Energy Inc. and its partners to defer spending at the $13.5-billion Fort Hills oil sands development, a project that has already been delayed for years due to fears over high costs.
Today's crude prices under $50 a barrel (U.S.) are well below the break-even level required for the northern Alberta project, where production is still two years off but spending is slated to be at its peak this year and next, analysts say. One possibility, they suggest, is a slowdown in expenditures as oil markets remain in a deep trough.
Suncor, Total SA and Teck Resources Ltd. sanctioned the development in late 2013 after years of intense study into how to reduce costs to a level that made it viable, given long-term expectations for crude prices and expenses for labour and materials. The mining and bitumen-extraction project had been shelved five years earlier amid the financial crisis.
The profitability of Fort Hills was questionable when the companies gave the project a green light, says Samir Kayande, analyst at ITG Investment Research in Calgary.
Last year, Mr. Kayande calculated that the project breaks even with West Texas intermediate crude at $90 a barrel. Suncor had said it expected a 13-per-cent after-tax rate of return assuming West Texas intermediate oil prices of $95.
"Given that the original decision to proceed was not economic, I don't know what would make you stop," he said.
"Now it's really uneconomic so maybe it's worth stopping."
Other analysts said it is more likely that the partners decide to cut back on immediate spending and push the startup date back. First oil is currently scheduled for the first quarter of 2017. Output is expected to hit 90 per cent of its planned production capacity of 180,000 barrels of bitumen a day within 12 months.
When Suncor announced its 2015 budget in mid-November, executives gave no indication that Fort Hills could be slowed, even as oil prices weakened. At the time U.S. crude was still above $74 a barrel. A Suncor spokeswoman said the company is assessing the impact of falling prices on planned expenditures, but offered no hint that it would slow spending.
"Our strong balance sheet is designed to enable long-life strategic projects, like Fort Hills, to continue through volatile periods such as we are experiencing now," Suncor's Sneh Seetal said.
The company has a projected operating life of 50 years, and oil markets will go through numerous cycles through that period, she added.
"It will be interesting to see. Three or six months from now, if oil prices stay at this level, I'd be shocked if they hadn't slowed down the pace [at Fort Hills]," said Michael Dunn, analyst at First Energy Capital Corp.
Suncor has shown in the past it will shut down major projects if the economics no longer work. In 2009, with the global credit crisis in full swing, the company shut down construction of its $11.6-billion Voyageur upgrading plant, and cancelled it altogether four years later.
Mr. Dunn said he does not expect the development to meet the same fate of Voyageur, unless crude prices stay at depressed levels for another two years.
Chris Cox, analyst at Raymond James, said he, too, believes that Fort Hills stands the highest risk among major oil sands projects under construction of being hit with some deferral.
"There's just such a large amount of capital that they still need to spend and the economics are pretty marginal at best, even if you assume a decent [oil] price recovery," Mr. Cox said.
With a file from Jeff Lewis in Calgary.