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Oil sands

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Of Note:

Crude futures nearing five-year lows.

Storage terminals in the U.S. are now nearing full capacity, pushing down prices for February crude.

Privately held BA Energy Inc. filed for bankruptcy protection this week.

"Companies have enough flexibility to weather the storm, but there will be some curtailment of capital programs."

Suncor Energy Inc. to announce new spending cuts when it reports its quarterly financial figures next week.

Connacher Oil and Gas Ltd., has already throttled back output at its Great Divide plant.


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Oil sands players retrench as crude slides

From Friday's Globe and Mail

CALGARY — Oil sands producers are set to make further cuts to their 2009 spending plans as the continuing fall in the price of crude stymies investment, according to industry observers.

Crude futures fell yesterday to $35.40 (U.S.) a barrel, nearing five-year lows, as the global economic meltdown has destroyed near-term demand for crude. Storage terminals in the U.S. are now nearing full capacity, pushing down prices for February crude.

The fall in prices, as well as the credit crunch, has already hit one oil sands firm hard; privately held BA Energy Inc., which doesn't produce oil but is seeking to develop a $5-billion (Canadian) upgrader, filed for bankruptcy protection this week as it can't repay a loan to Value Creation Inc., its parent company.

Value Creation will still build the upgrader, which would process oil sands bitumen into lighter crude, but the difficulty in accessing debt markets means the project will be delayed, said chief executive officer Columba Yeung.

"We're pretty certain that we can build these projects, but the debt financing has given us - and everyone - a major headache," he said. "In today's economic environment it is so difficult to raise equity and debt that [the construction of the upgrader] would involve a significant joint venture partner."

The company will now concentrate on developing its oil sands steam extraction project in order to bring cash flow on stream, while it pursues discussions with firms over taking an equity stake in the upgrader, he said.

While other oil sands firms are better funded than BA Energy, having raked in profits when oil prices hit $147 (U.S.) a barrel last July, many still have had to delay or cancel future projects. The ongoing downward price spiral means that even further budget reductions may be necessary, analysts said.

"Companies have enough flexibility to weather the storm, but there will be some curtailment of capital programs," said William Lacey, a Calgary-based analyst with FirstEnergy Capital Corp.

Mr. Lacey expects major oil sands player Suncor Energy Inc. to announce new spending cuts when it reports its quarterly financial figures next week. He also said that Canadian Oil Sands Trust, the largest shareholder in the Syncrude Canada project, could reduce its distributions to conserve cash.

Suncor would not comment.

Canadian Oil Sands Trust spokeswoman Siren Fisekci wouldn't comment on whether distributions would be cut.

While the trust has a greater ability than some other firms to withstand a weak market because its oil sands facility is already operating, it could potentially look at deferring maintenance costs if oil prices stay low, she added. "But we're not at that point yet."

Suncor has already reduced its oil sands budget for 2009 once; the company said in October that it would spend only $6-billion (Canadian) this year, as opposed to the $10-billion that was previously planned, with the bulk of cuts affecting the pace of development of its Voyageur oil sands plant. The company didn't return calls seeking comment on the possibility of further cuts.

The oil price is nearing the $35-a-barrel (U.S.) point where it's not even economic to continue producing crude from existing projects; one junior oil sands producer, Connacher Oil and Gas Ltd., has already throttled back output at its Great Divide plant.

It's unlikely that production will be reduced at the major oil sands mines, such as those run by Suncor or Syncrude, as it's most economic to keep those running at full capacity. However, companies could start to curtail output at other smaller oil sands steam extraction plants if the price weakness persists, said BMO Nesbitt Burns Inc. analyst Randy Ollenberger.

http://www.theglobeandmail.com/servlet/story/RTGAM.20090116.wroil16/BNStory/energy/?page=rss&id=RTGAM.20090116.wroil16

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