TrueNorth Energy LP said it is deferring development of its $3.5-billion Fort Hills oil sands project, partly because of uncertainty about the potential impact of implementing the Kyoto climate-change pact.
The decision means TrueNorth will close its Fort McMurray office, while its Calgary office will operate with a smaller work force as of Jan. 31.
"We fully intend to preserve the value of the assets and our options to proceed," TrueNorth chairman Dave Robertson said in a statement.
"However the escalating costs experienced by established developers, challenging capital markets, and general uncertainty about the potential impacts of Kyoto's implementation have all contributed to our board's decision."
TrueNorth said only that it would re-evaluate the decision "when conditions improve."
In September, TrueNorth pointed to Kyoto as one of the reasons spending on engineering work for Fort Hills was cut 75 per cent the latest quarter. TrueNorth's announcement was followed by a number of other companies, including Husky Energy Inc. and Canadian Natural Resources Ltd., saying that Kyoto had influenced decisions to cut back.
A minority partner in the project, UTS Energy Corp., said in November that construction would not begin next year and production will not start in late 2005 as scheduled, since TrueNorth and its corporate parent have not been able to attract another investor to buy part of their holding.
"The $120-million invested in exploratory drilling, project engineering and regulatory approval has enhanced the value of the Fort Hill's oil sands leases," TrueNorth president and chief executive officer David Park said in Tuesday's announcement.
"Our drilling program identified the location of 2.8 billion barrels of reserves. Our engineering has defined the project scope. We have licensed proven, energy-efficient technology. And, regulatory approval means Fort Hills has the government's green light to proceed."
The Alberta Energy and Utilities Board gave the green light to develop the Fort Hills project, which will produce 190,000 barrels a day when in full operation. The Fort Hills site is located about 90 kilometres north of Fort McMurray.
Tuesday's announcement comes just months after TrueNorth executives had warned that Kyoto obligations could be "lethal" to oil sands development in Canada.
"We are very concerned that Kyoto, if ratified and implemented in a not-very-thoughtful manner, could kill the project," Mr. Park had said in September.
In a separate statement, Calgary-based UTS Energy said it was disappointed by TrueNorth's decision and said it would work with TrueNorth's parent company, Flint Hills Resources, to resolve the situation.
A key condition of Flint Hills - and TrueNorth - proceeding with the project was reducing its ownership stake in the Fort Hills development.
"UTS Energy remains committed to the Fort Hills oil sands project and will seek the cooperation and support of Flint Hills to effect an early and meaningful resolution to this project deferral," UTS chairman and chief executive Dennis Sharp said.
Last week, Calgary's Suncor Energy Inc. said it expected to see "no material impact" on its business or growth from the Kyoto Protocl and pushed ahead with its capital expenditure program focused on increased oil sands production.
The company said it will spend $1.05-billion in 2003, up from $900-million in 2002.
"Suncor currently estimates that in 2010, the exposure of the Kyoto Protocol on the company's oil sands cash operating costs would be about 20 cents to 27 cents per barrel," Suncor said in a statement last week.
"This projection assumes a production level of 500,000 barrels per day has been achieved and that the maximum price for carbon credits would, as the Federal Government of Canada has pledged, be capped at $15 per tonne of carbon dioxide equivalent."
As well, it said, it "does not anticipate the cost implications of the Kyoto Protocol will have a material impact on its business or future growth plans."