BlackGold project on hold until price revives

Harvest Operations won’t activate almost- completed oilsands facility

Korean- owned Harvest Operations Corp. has cut 105 jobs and will delay startup of its 10,000- barrelperday BlackGold thermal oilsands project until benchmark New York oil prices improve to above $ 60 US per barrel.

The Calgary- based arm of Korea National Oil Corp. said it has completed construction of well pads, connecting pipelines and the central processing facility at BlackGold but will perform only “minor pre- commissioning activities” throughout 2015.

“In a very low price environment we see today, it does not make commercial sense to start steaming and trying to start production,” chief operating officer John Wearing said on a Wednesday morning conference call.

“Our target for startup would be somewhere above $ 60 WTI ( West Texas Intermediate), which would give us, we think, commercial viability to start the project.”

On Wednesday, WTI closed at $ 50.09.

Delaying startup is an unusual move for a producer’s first oilsands project as most want to prove the resource to investors and start generating returns.

But Harvest has the luxury of taking its time, company executives said on the call. They confirmed they have access to an undrawn $ 171- million loan facility from KNOC to act as a liquidity lifeline in case low commodity prices persist.

In an interview, Wearing said Harvest has about 550 employees following the layoffs. About 70 of the lost jobs were in Calgary. Of the 105, about 30 were directly related to the oilsands project and the rest with its conventional drilling activities.

Harvest increased its cost estimate for BlackGold, a steamassisted gravity drainage project southeast of Fort McMurray, last year to about $ 900 million because of weather- related construction delays and because it decided to pre- build parts of its planned 20,000- bpd second phase.

The number doesn’t include the cost of buying the leases in 2006 and is nearly double the estimate made when KNOC sanctioned the project in 2010.

Oilsands analyst Michael Dunn of FirstEnergy Capital, who doesn’t cover Harvest, agreed the delaying strategy is unusual.

“Smaller projects have a higher operating cost structure than larger projects so, assuming that in the meantime Harvest’s fixed cost base at BlackGold is not that severe, it might make sense,” he said.

He added there aren’t many other small projects scheduled to start up in the immediate future. Athabasca Oil Corp.’ s 12,000- bpd Hangingstone is one, “but they will not delay steaming as they want to prove to investors that Hangingstone will work.”

Wearing said Harvest has spent about $ 250 million to complete most of its 2015 drilling campaign in the first quarter. He wouldn’t give a full- year capital budget number because he said it will depend on the commodity price.

“In terms of the constrained commodity price environment, we’ve basically shut down our capex activities after the quarter,” said treasurer Grant Ukrainetz on the call. “Our goal ... is to live within our means.”

Harvest reported fourth- quarter 2014 production from its conventional western Canadian operations of 42,500 barrels of oil equivalent per day, down from 49,200 boe/ d in the same period of 2013.

The numbers don’t include production from joint ventures with Kerr Canada Co. Ltd. struck in the second quarter of last year. Kerr is owned by a consortium of Korean investors and is providing cash to develop land contributed by Harvest under a multi- year agreement.

Harvest said it received an average fourth quarter price of $ 62.75 per barrel for oil and natural gas liquids, down from $ 70.68 a year earlier, and $ 3.21 per thousand cubic feet for natural gas, versus $ 3.86. Its revenue was $ 172 million, versus $ 223 million, and it posted an operating loss of $ 283 million, compared with income of 2.3 million.

It said it sold heavy oil assets in Alberta and Saskatchewan in the fourth quarter for net proceeds of $ 197 million, using some of it to buy Hunt Oil Company of Canada, Inc., for $ 36 million in cash to add to its core areas in Alberta.

In November, Harvest sold its money- losing oil refinery at Come by Chance, N. L., to SilverRange Financial Partners LLC of New York.

It didn’t reveal the purchase price at the time but in a filing with regulators Tuesday said the sale brought in $ 70.5 million. The difference between buying and selling price resulted in a net loss of $ 56.6 million.

KNOC inherited the refinery when it bought Calgary- based Harvest Energy Trust in 2009 for $ 1.7 billion.

Harvest reported that as of Dec. 31, its total proved plus probable reserves base was 427 million barrels of oil equivalent, an eight per cent decrease from 2013.

It does not make commercial sense to start steaming and trying to start production.