Oil Sands Truth: Shut Down the Tar Sands

Tar Sands sales dropping dramtically

Oil sands deals lose traction

JEFFREY JONES

CALGARY — The Globe and Mail

May. 24 2013

There’s a buyers’ strike in the oil sands.

At least a half dozen energy companies have come up dry in efforts to attract the rich bids they envisaged when they put oil sands assets on the auction block in the past year, showing downward pricing pressure on a sector touted as the cornerstone of Canada’s economic growth.

Would-be buyers and joint venture partners are balking at deals amid a combination of wildly volatile Canadian crude prices, rising development costs and weakening returns, a situation that could force the industry to temper heady expectations for long-term oil sands production growth.

Marathon Oil Corp., Murphy Oil Corp. and Athabasca Oil Corp. had sought buyers and partners in the Northern Alberta oil sands, but now have changed their minds – or in Athabasca’s case, have told investors to hang tight after the company failed to clinch deals that had once appeared imminent.

Those companies join ConocoPhillips Co., Koch Industries Inc. and Royal Dutch Shell PLC in being disappointed after putting properties up for sale that may have once attracted bids totalling in the billions of dollars. Those three say they have rethought their plans after offers failed to meet expectations.

Unsold assets are another indication that oil price uncertainty, competition for limited pipeline capacity and high industry costs are turning away investment in the world’s third-largest crude reserves after those in Saudi Arabia and Venezuela.

The deals slowdown may also add to a pullback in the sector’s spending and development frenzy.

Suncor Energy Inc., Canada’s largest oil company, is spending about $1-billion less on its oil sands projects this year compared with early expectations for 2012, while reviewing costs.

“We as a shop haven’t been bullish on oil sands for over a year. Part of the reason for that is that costs keep going up and the revenue is not following. This is an unusual situation from over the last 10 years,” said Samir Kayande, an analyst and oil sands evaluation expert with research firm ITG Inc. “Over the last 10 years, you would make investments in marginal projects and the commodity price would always bail you out.”

That seems like a distant memory. In the past half year, the discount on Western Canada Select heavy blend crude versus benchmark West Texas intermediate (WTI) widened beyond $40 a barrel, boomeranged back to as little as $12, and is now about $20.50, according to Net Energy Inc.

For new steam-driven oil sands projects, the break-even WTI price is around $83, compared with $60 to $70 a barrel for light oil production in the fast-growing Permian Basin region of West Texas, Mr. Kayande said. The heavy oil spread has to be layered on to the benchmark oil calculation, showing just how efficient a project has to be in terms of the amount of steam companies must pump into the ground to get a barrel of bitumen out.

Even interests in producing mining projects have proven to be a tough sell, especially after Ottawa restricted the ability of foreign state-owned enterprises to acquire oil sands assets in the wake of Chinese state-owned CNOOC Ltd.’s $15.1-billion bid for Nexen Inc. That essentially took away a category of customer.

Houston-based Marathon said on Thursday that it has ended talks to sell part of its 20-per-cent stake in the Shell-operated Athabasca Oil Sands Project after seven months.

A Marathon spokeswoman declined to say why the deal fell through. The company still aims to divest up to $3 billion (U.S.) of assets in other parts of its global portfolio through 2013 to boost value for its shaholders, it said.

Murphy Oil of El Dorado, Ark., hired investment bankers last October to evaluate selling its 5-per-cent stake in Syncrude Canada Ltd., one of the two largest oil sands operations. In January, it decided against going ahead with a sale, and executives have since said they needed a “compelling” offer that tops the current cash flow multiple of Canadian Oil Sands Ltd., Syncrude’s largest owner and a proxy for the value of the assets.

“But barring that and some of the strategic need for the proceeds either in development of other projects, no, we really don’t see it, a process being started,” chief executive officer Steven Cosse said following the release of first-quarter results in early May.

Athabasca had appeared close to multibillion-dollar joint venture deals with Kuwait Petroleum Corp. and Spain’s Repsol YPF SA last summer to develop its Hangingstone and Birch oil sands projects, according to sources familiar with the talks. The deals were said to have stalled in late 2012 as the federal government agonized over its policy regarding foreign takeovers of oil sands assets.

The company, whose shares at $6.42 at Thursday’s close are worth less than half what they were in October, said it has not abandoned its search for partners.

“What I can confirm is that joint venture is the way we grow our company, and that talks are ongoing on a number of our assets for joint ventures,” said Athabasca vice-president Andre De LeeBeeck.

ITG has forecast overall Western Canadian oil output to nearly double to 5.7 million barrels a day by 2025, based on an exhaustive study of about 260 projects, with much of the gain coming from the steam-driven oil sands. Mr. Kayande said the recent investment chill has not yet prompted him to lower his projection.

“But if profitability continues to be pressured, there’s definitely risk to the growth forecast,” he said.

http://www.theglobeandmail.com/report-on-business/industry-news/energy-a...

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