The Bank of Canada says the Canadian economy is on the razor's edge of recession, and a full recovery is dubious and distant.
Plunging oil and equity markets and the global credit crunch tightened their grip on Canada's oil sands Thursday as two more major players, UTS Energy Corp. and Suncor Energy Inc., announced big actual or potential spending cutbacks and project delays.
UTS, one of three partners in the $23.8-billion Fort Hills oil sands development, said the group may defer any decision to build a planned upgrader because of “costs, current commodity, equity and credit market conditions.” Instead, it would proceed only with the mining and extraction portion of the development, whose costs UTS estimated at $13-billion to $15-billion.
UTS's announcement came a little more than a month after it and its Fort Hills partners, Teck Cominco Ltd. and Petro-Canada, revealed a more than 50 per cent jump in their cost estimates for the project to nearly $24-billion from $14-billion.
“We believe that proceeding prudently with a bitumen project would decrease our overall funding requirements, and thereby extend the duration of UTS' current funding into the first quarter of 2010,” UTS chief executive officer William Roach said in a news release. “Moreover, this will allow more time for the equity and debt markets to recover, at a time when we are placing the additional funding for the project.”
This echoed remarks made by Suncor CEO Rick George that the company has slashed its 2009 capital spending budget by one-third to $6-billion, just a month after raising it by 20 per cent. The Calgary company also said that it expects to maintain “similar levels” of capital spending through 2012 and that it is slowing down construction of its Voyageur upgrader, delaying its targeted completion date by about a year.
“Our aim is to ensure we are living within our means during a time of market uncertainty, while also making the strategic spending decisions that will allow us to continue our growth path,” Mr. George said in a news release.
Next year's spending plan now includes $3.6-billion for Voyageur, for which Suncor has budgeted a multi-year total of $20.6-billion, and $2.4-billion for its base businesses. This comprises about $1.7-billion for oil sands operations, $300-million for natural gas exploration and production and about $400-million for planned maintenance and environmental improvements in its refining and marketing division.
“We remain committed to an integrated expansion strategy and targeted oil sands production of 550,000 barrels per day,” Mr. George said. “However, we've always had options available to us in terms of how the expansion is rolled out – and we believe in the current economic environment it's prudent to exercise that flexibility.”
The moves by UTS and Suncor come after a plunge in both oil equities and crude prices, amid fears of slumping demand as concerns over a global recession intensify.
Suncor's shares, for example, have fallen almost 51 per cent since the beginning of the year. They closed on the Toronto Stock Exchange Wednesday at $26.46, down $2.37 from Tuesday's finish, and $45.91 below the 52-week high of $72.37 they hit in May. More than $34 of that plunge has come since the end of August.
UTS has been hit even harder. Its shares closed on the TSX Wednesday at just 99 cents, down 18 cents from Tuesday and fully $5.32 or 84 per cent below their 52-week high last October. They began plunging in at the end of June, when they were still hovering at about $6.
Both stocks fell rallied slightly in early trading Thursday that saw the S&P/TSX composite index climb, slightly. However, Suncor quickly gave up its gains and headed down again, losing 58 cents to $25.88. UTS first climbed 7 cents to $1.06, although it was back to $1.03 about 40 minutes after the opening bell.
The equities have been ravaged as the price of oil tanked. West Texas intermediate sweet crude, for instance, has fallen to $65.85 (U.S.) a barrel – as of Wednesday's close – from about $117 in late August and about $127 at July 30.
Suncor is not the only Canadian resource company to scale back or delay major plans.
Just last Wednesday, Calgary-based EnCana Corp., North America's largest natural gas producer, officially put its plan to split itself in two on the back burner, citing the turmoil in global financial markets.
As well, Nexen Inc., OPTI Canada Inc. and BA Energy Inc., have already delayed or postponed the construction of new oil sands upgraders, saying the projects are too costly in the current environment.
Analysts also had speculated that Fort Hills and a number of other major projects would likely share the same fate. They contend that major oil sands projects can not be economic without long-term oil prices in the range of $85 and $100 a barrel.
There also is a growing list of Canadian mining companies that are mothballing mines or deferring expansion because of weak metals prices.
- With a file from Norval Scott in Calgary
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