Time for Fort Hills decision, Total says

‘Before end of year’: chairman tells Suncor

MON TR E A L • Total SA is pressing its partner Suncor Energy Corp. to take a final investment decision on the Fort Hills oil sands project before the end of the year, according to its chairman.

“What is important is to start Fort Hills as quickly as possible. That is going to bring production and cash to the company,” Christophe de Margerie, chairman and CEO of the French energy giant, said Monday. “What we discussed with Suncor [Sunday], we need to move quickly on Fort Hills and make it not only a project, but [in] production. It is time to take an FID [final investment decision] — before the end of the year.” New housing already purchased and in the pipeline continues to propel the Canadian real estate market but worries persist about what happens when that tap turns off.

For now, the industry got another bit of good news Monday with Canada Mortgage and Housing Corp. saying new home construction or starts reached the lofty 200,000 level in May on a seasonally adjusted annualized basis.

CMHC said urban multiple starts, mostly condominiums, made up 114,346 of the 200,178 May figure. May starts easily outpaced the April number of 175,922.

“Gains in the multiple starts segment partly offset the moderation in activity that was observed in previous months, especially in Atlantic Canada and Ontario. As a result, the trend in housing activity remains close to its historical average and is in line with estimates of household formation,” said Mathieu Laberge, deputy chief economist at CMHC.

While these numbers paint a good picture, most of the construction going on today is of previously sold units rather than a sign of fresh interest in the housing market, said Benjamin Reitzes, senior economist with Bank of Montreal.

“Before you put shovels in the ground for multiples, you need to sell a majority of the units,” he said. “Some are concerned if all these units hit that market at the same time you will get a flood of units and a lot of them being owned by investors who will bail out.”

Ben Rabidoux, analyst and strategist with U.S.-based Hanson Advisors, said we are seeing a last hurrah in the housing sector before a glut of homes hits the market.

“The condo market is very well supplied to begin with in the resale and new front. Even if they presale to 80%, they don’t sell to just end users, there are investors,” Mr. Rabidoux said. “The demand is not there from end users. It’s simple economics, it can’t continue.”

Total has a 39.2% stake in the development with Suncor owning 40.8%. Teck Resources Ltd. owns the remaining stake.

The project, 90 kilometres north of Fort McMurray has an estimated 3.4 billion barrels of bitumen reserves to be recovered. The first phase of 160,000 barrels per day has secured approvals.

“We need to stop delaying it,” Mr. de Margerie said in an interview on the sidelines of the Conference of Montreal, a three-day economic conference.

In March, the French company made a decision with its partner Suncor to abandon to the Voyageur upgrader project as Mr. de Margerie said it was no longer needed because of the glut of condensates from shale resources.

While Mr. de Margerie says the Paris-based giant remains committed to its oil sands projects, he does not believe the Canadian Association of Petroleum Producers projections for oil sands growth are realistic.

Last week, CAPP forecast that production from Alberta’s bitumen reserves, the

world’s No. 3 crude deposit, is expected to climb 26% from 2012 to 2.3 million barrels a day by 2015, rising to 5.2 million barrels by 2030.

“I think it’s a bit optimistic. But it puts pressure on government to say, ‘ We could do this, it is feasible.’ But when you see the time it took to deliver existing production, because of delays, pipelines and government approvals…. It’s little bit optimistic. It will take longer.

“They [the oil sands] are great beautiful, long-term resources.”

The chairman expects TransCanada Corp.’s Keystone XL and Enbridge Inc.’s Northern Gateway project to go ahead, because “in the end people are not crazy. They know it is necessary.”

The company has been eyeing new businesses, beyond its key oil sands ventures, but the chairman says not all the liquefied natural gas (LNG) projects will go ahead on Canadian West Coast.

Mr. de Margerie, who considers Canada, including its LNG sector, a priority, said the company was close to a deal in the upstream sector.

“It has been very close, but has faded a little bit. Today, I am not sure we are so close. It was on the upstream side.”

“We insist on having access to resources. I am not interested in LNG if we don’t have access to upstream resources.”

Agreement on resource prices and the advent of Asian buyers stalled the deal.

Indeed, development costs are a key concern for the industry at a time of falling prices. Like other oil majors, Total is under pressure to deliver results to shareholders who have not seen a rise in oil and gas opportunities translate into higher profits and robust share prices.

Total’s net profit in the first quarter fell 58% year-on-year partly because a $1.65-billion loss booked after pulling out from the long-delayed oil sands Voyageur Upgrader project. Even without the one-off loss, production fell 2% and net profit 7%.

The company has divested some Nigerian and French assets and is increasingly looking at projects in Angola and Kazakhstan to generate growth.

Within developed countries, Mr. de Margerie is looking at opportunities in Canada and Australia to generate growth.

But he remains worried about higher development costs and says next year will be “interesting to see” how U.S. and Canadian producers react to the new model of higher development costs and lower commodity prices.