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Financial Post (Canada): PetroCan, partners sink $33.4B into oilsands

Biggest investment yet in sector ends Fort Hills doubts

Claudia Cattaneo And Jon Harding, Financial Post
Published: Friday, June 29, 2007

CALGARY – As oil prices sailed past a nine-month high of US$70 a barrel yesterday, Petro-Canada and its partners pushed forward with Canada’s largest oilsands investment yet: a $33.4-billion oilsands-mining venture they said can generate a reasonable return even if oil dips to US$45.

The move casts aside uncertainty about the future of the once-beleaguered project, known as Fort Hills, and helps restore a measure of faith in the oilsands after months of doubt due to cost escalations.

“The number one message we get [from the announcement] is that these companies are willing to go ahead with high levels of oilsands spending because they are very bullish about oil prices,” said Mike Tims, chairman of Peters & Co. “It’s also reflective of how tough it is for oil and gas companies globally to add oil supply.”

Fort Hills, a partnership between operator Petro-Canada, UTS Energy Corp. and Teck Cominco Ltd., is proceeding as a massive commitment that will yield 280,000 barrels of synthetic crude oil a day by 2014, even after its backers stepped back six months ago to evaluate whether it made economic sense, and considered starting small to soften the cost hit and execution risk.

“Fort Hills is Petro-Canada’s largest project to date,” Ron Brenneman, president and chief executive, told analysts in a conference call. “We fully recognize the execution risk with this venture, but we believe with prudent planning and management we can mitigate that risk and deliver a project that will produce solid returns over a long period of time.”

Fort Hills will be Alberta’s fifth major integrated mining and upgrading project, joining those run by Suncor Energy Inc., Syncrude Canada Ltd. and Royal Dutch Shell PLC, which are already in production, and Canadian Natural Resources Ltd., which is a year away from production.

While all have ambitious expansion plans, Fort Hills is the first to lay out the longer-term costs for the first two phases, a step that others have been reluctant to take because of cost volatility.

The project would cost $26.2-billion for the first two phases, plus $1.9-billion for front-end engineering and design and $5.3-billion in third-party capital. The estimates include a 29% contingency to cover cost escalations and inflation. Petro-Canada said it will fund its share of the venture from cash flow and possibly some debt.

“[Oilsands projects] are expensive, but we believe that at a reasonable oil price, and US$45 is a reasonable oil price, we can make money in this business,” said Neil Camarta, Petro-Canada’s senior vice-president for oilsands.

“The first phase is going to be tough, because it’s carrying all this infrastructure, and it’s going to be tight, but if you can land it safely, on budget and on schedule, we have all this growth to go. And we expand it — the expansions are a lot more profitable than the base projects.”

Petro-Canada said the project will yield an 8.2% rate of return with oil prices at US$45. That return increases to 13.4% once the second phase is up and running and assuming oil prices at US$60.

Oil prices closed at US$69.57 a barrel, a nine-month high, after reaching US$70.52 on the New York Mercantile Exchange, on stronger U.S. refinery demand.

Plans call for the first phase of the Fort Hills mine to be completed by the end of 2011 and the second phase by 2014. The company has delayed completion of the upgrader part of the project to alleviate labour requirements.

The mine is north of Fort Mc-Murray, while the upgrader is outside Edmonton. The staggering of the two projects will put less pressure on labour requirements and allows Fort Hills to start big, rather than in smaller phases — a strategy that was considered, Mr. Camarta said.

“The thing that keeps me awake at night is: Where is my next welder going to come from?” Mr. Camarta said.

“What I have done is try to get that peak demand down, so by staggering the mine and upgrader startups by six to nine months, we are not competing with ourselves at peak. That has allowed us to bring down the total demand for workers to 8,000, but the key thing is that it’s the hot trades — the welders, electricians and pipefitters — that are down under 4,000 now.”

Of those, as many as 2,000 will be sourced outside Alberta, including overseas, he said.

The decision to move forward removes the major uncertainty for UTS, for which Fort Hills is the major asset. The company owned the leases originally and put the partnership together.

President and chief executive Will Roach said in a conference call that Fort Hills partners bring deep experience — Petro-Canada because of its history as a partner in the Syncrude plant, Teck Cominco as one of the world’s largest cold-weather miners.

“We stand a pretty good chance here of delivering this one within the budget advertised,” he said.

UTS will have to raise $4-billion to pay for its 30% share of the project, which it may do by raising equity or debt, selling other oilsands assets, or would consider reducing its stake in the project.

“I personally do not see us going down below 20%, and it’s probably higher than that,” Mr. Roach said.

COSTS UP: – Canadian Natural Resources Ltd., Horizon project. First phase due to produce 110,000 barrels a day of synthetic crude oil by late 2008. The company estimated a cost of $6.8B but recently said the final cost could be 5% to 12%higher, to $7.6B. – Royal Dutch Shell PLC, first expansion of the Athabasca Oil Sands Project. Will produce 100,000 barrels a day by 2010 and cost up to $12.8B. – Petro-Canada, UTS Energy Corp., Teck Cominco Ltd., Fort Hills project. First phase will produce 140,000 barrels a day of synthetic crude oil by 2012 and cost $14.1B.

© National Post 2007

http://www.canada.com/nationalpost/financialpost/story.html?id=55d9f000-7891-4a3b-aa79-2bb3bd4414dd&k=60563

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