‘Facing a new business reality’

Statoil puts oilsands expansion project on hold over expense concerns

Nine months after dissolving a thermal oilsands joint venture in northern Alberta, Norway’s Statoil

ASA has put a 44,000-barrel-a-day expansion project on hold for at least three years, citing high costs.

The company said Thursday it has decided to postpone the Corner project in its Kai Kos Dehseh oilsands development, a decision that will result in the loss of 70 jobs, mainly at its Canadian headquarters in Calgary. In an interview, Statoil Canada country manager Stale Tungesvik said the project’s ability to compete with other Statoil investments has been hurt by rising costs for materials and labour. The company is also concerned about pipeline access issues that have reduced realized prices for western Canadian crude.

“In oilsands, and actually globally, too, we are facing a new business reality,” he said. “We need to make our assets and operations more profitable and cost-efficient. The Corner decision is more based upon that perspective.”

He said Statoil remains committed to investing in Canada, however, pointing out that it is participating with Calgary-based partner Husky Energy Inc. to develop a major oilfield discovered off the coast of Newfoundland last year. Drilling in the Bay du Nord area is expected to commence next month.

“Within the company, every project has its own merits,” he said. “What happens on East Coast has a totally different timeline so it’s not connected at all (to the Corner decision).”

He denied the decision was made because of the poor environmental reputation of the oilsands. Statoil, two-thirds owned by the government of Norway, has been roundly criticized at home for its oilsands investments.

Statoil has not released a capital cost estimate but oilsands analyst Michael Dunn of FirstEnergy Capital said Corner would probably cost about $2 billion, based on an industry average cost of $50,000 per flowing barrel. He said the project likely would face higher costs because it is a greenfield development located on a separate lease to the northeast of Statoil’s producing Leismer project.

“I think the challenges for them are more than if they were someone like Cenovus (Energy Inc.) or MEG (Energy Corp.), where you’ve got all these expansions, moving from one to another and continuously expanding,” he said.

“That makes this kind of project much more costly than a brownfield expansion at an existing site.”

Tungesvik said the company will use the three-year delay to rethink its oilsands strategy.

“I believe I need to revisit myself about a bigger greenfield project — maybe I should look more into smaller building blocks that are more flexible and add production more by little steps than bigger steps,” he said.

He wouldn’t say if he will recommend going ahead with a planned 40,000-bpd expansion at Leismer, noting only that an assessment of the project is due by the end of the year.

Statoil entered Kai Kos Dehseh by buying North American Oil Sands Corp. in 2007.

In 2011, Thailand’s national oil company PTTEP bought a 40 per cent interest for $2.28 billion US.

Early this year, Statoil announced it and PTTEP had agreed to split their interests in the 1,100 square kilometres of leases, estimated to be able to produce 200,000 barrels per day once fully developed.

Statoil agreed to pay $200 million US and took over Leismer and Corner, while PTTEP took the other three licences covering about 610 square kilometres and said it would accelerate development there.

Leismer is currently producing about 18,000 bpd of its rated capacity of 20,000 bpd, Tungesvik said, after averaging about 14,000 bpd last year.

It uses steam-assisted gravity drainage, t he same technology intended for Corner, where steam is injected into a horizontal well to induce the sticky heavy bitumen to flow into a parallel well to be produced.

Foreign companies developing Alberta’s oilsands have met with mixed success.

In August, Harvest Operations Corp., owned by Korea National Oil Corp., reported cold weather construction delays last winter and escalating labour costs had added $94 million to the capital cost of its BlackGold thermal oilsands project.

It said it had ratcheted up its 2014 capital budget for the 95 per cent complete 10,000-barrel-per-day project to $235 million from $131 million set last fall.

Total SA said last spring it would cut 150 jobs at the Joslyn oilsands mining project it shares with Suncor Energy Inc. and delay a final investment decision as costs escalate.

Greenpeace campaigner Mike Hudema said Thursday Statoil’s move proves that high-profile campaigns against pipeline proposals like Keystone XL, which would connect up to 830,000 barrels per day of mostly oilsands crude to Gulf Coast refineries, are working.

This month, Keystone XL will have spent six years waiting on U.S. regulatory approval.

“Now we need to ensure the billions not spent on Statoil’s Corner project are redirected to renewable energy solutions that solve the climate problem not accelerate it,” he said in an e-mail.

A report by the Canadian Association of Petroleum Producers in June predicted oilsands production would grow at a slower pace than previously expected due to rising costs.

The association forecast oilsands production hitting 4.8 million barrels a day by 2030 compared with last year’s output of 1.9 million barrels. However, that figure is down from the 5.2 million barrels of daily oilsands output CAPP predicted last year.

… I should look more into smaller building blocks that are more flexible and add production more by little steps than bigger steps STALE TUNGESVIK