Canada's Atlantic oilmen drill on despite problems - Financial Times, September 29
By Scott Morrison
The report from Petro-Canada was not encouraging. The company, one of the largest Canadian energy groups, warned last week that its Terra Nova project, which will tap oil reserves off Canada's east coast, was behind schedule and over budget.
The announcement depressed Petro-Canada's share price and prompted some observers to question whether the drive to exploit Canada's Atlantic energy reserves was getting bogged down by technical difficulties, escalating costs and disappointing drilling results.
But while the nascent sector has certainly experienced some growing pains, most energy analysts agree that oil and gas producers in eastern Canada have moved at an aggressive pace despite the difficult challenge of developing the region's offshore energy reserves.
Petro-Canada's warning made a particular impression because it was the second time in the past year the company had increased costs and moved back its production target date for Terra Nova, the country's second offshore oil project.
The company said a series of delays and additional work requirements would increase capital costs by CDollars 300m (USDollars 200.5m) to CDollars 2.5bn.
Total capital and operating costs are now expected to reach CDollars 4.8bn. The difficulties will also push the project's production date back into the second quarter of next year, almost six months behind Terra Nova's initial target. Terra Nova is now expected to produce 49,000 barrels a day in 2001, rising to a daily average of 129,000 b/d in 2002.
Analysts say this is more worrisome because the delay means Terra Nova's owners are not taking advantage of current high energy prices. "The revenue side of the equation is much, much more important than the capital side," says Martin Molyneaux, an energy analyst at FirstEnergy Capital in Calgary.
Petro-Canada is the operator and lead partner in Terra Nova, with a 34 per cent stake, while Mobil Canada, the ExxonMobil subsidiary, has a 22 per cent interest. Other partners include Norsk Hydro Canada, Husky Energy and Murphy Oil.
Disappointment over Terra Nova is compounded by questions about the region's third project, known as White Rose, which is 73 per cent owned by Husky Energy, the Canadian energy group controlled by Hong Kong billionaire Li Ka-Shing.
Industry observers question whether the project's CDollars 1.8bn price tag is realistic given that offshore development costs are increasing due to tight supply of floating drilling platforms.
Mr Molyneaux suggests White Rose could cost as much as CDollars 500m more than budgeted. But despite these problems, industry observers say they remain optimistic about prospects for Canada's east coast energy projects.
"They're going through growing pains. These are companies that are not offshore operators. But the economics of the east coast are not unravelling," says Wilf Gobert, an analyst at Peters & Co in Calgary.
Prospects on Canada's Atlantic coast took off in 1997 when the CDollars 5.8bn Hibernia project went into production after years of delays and numerous cost over-runs. The massive platform was designed to produce 150,000 b/d of crude oil and can withstand a direct hit by an iceberg - a real threat in the area.
Unlike Hibernia, Terra Nova features a floating production, storage and offloading (FPSO) vessel that can move to avoid icebergs. It is in many ways similar to FPSO vessels in use in the North Sea, but the Terra Nova platform has been strengthened to weather more turbulent conditions.
Another prospect in the region, known as Hebron-Ben Nevis, could become Canada's fourth offshore oil project if additional drilling proves there are sufficient reserves. The region is important to Canada's long-term future as an energy producer.
Reserves of conventional oil in Alberta, long the lifeblood of the country's energy sector, are being depleted.
Offshore oil reserves on Canada's eastern flank are one of several important new resources coming on stream. Horizontal drilling developed in the North Sea will enable Canadian producers to tap less accessible and more expensive offshore oil reserves.
Natural gas is another hot commodity off Canada's eastern shore. The Sable Island project, a venture between Mobil Canada, Shell Canada and Imperial Oil, began delivering gas this year and was expected to produce 500m cu ft per day by the end of the year - the first of many possible developments in a region believed to contain sizeable resources of natural gas. |
