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Varcoe: 'A very simple message': Canadian Natural defers spending on major oilsands proposal, ahead of April 1 deadline on MOU

'Specifically, what we want to ensure is that the MOU comes out with a policy that provides that economic viability for these long-term projects that will fill an export pipeline going to the West Coast,' said Canadian Natural Resources president Scott Stauth

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Sometimes, you don’t need to read tea leaves to interpret what signal is being sent — the message is obvious.

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On Thursday, Canadian Natural Resources — Canada’s largest oil producer — delivered such a message while releasing fourth-quarter results, announcing it has cut about $310 million from its forecast operating capital expenditures this year.

That includes deferring about $150 million of spending related to front-end engineering design work for the $8.25-billion Jackpine oilsands mine expansion opportunity at the company’s operations about 70 kilometres north of Fort McMurray.

And it’s occurring at a pivotal moment, when the country’s largest oilsands producers — called the Oil Sands Alliance — are in negotiations with federal and provincial governments on their own memorandum of understanding (MOU) surrounding the long-awaited Pathways carbon capture network.

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In a news release, the Calgary-based company cited a “lack of finalization of government regulatory policies as it relates to carbon pricing and methane, which creates uncertainty and economic burden for long-term growth investments.”

Restarting the work on the Jackpine mine expansion will depend on the outcome of regulatory process changes that could come out of the MOU, as the company looks for future projects to be competitive for attracting global capital, Canadian Natural Resources president Scott Stauth said in an interview.

“We just take the view that if there’s carbon policies or carbon cost on top of the capital, and on top of the operating cost, then that will likely impede the economic viability of a project, such as a Jackpine mine expansion,” said Stauth.

“We understand and we think it’s a good idea to do the Pathways project and to capture CO2 from the oilsands areas. And we don’t think it’s a good idea to have carbon tax, carbon cost, on top of the capital and operating expenditures.”

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The Jackpine mine expansion is expected to increase the company’s output by 150,000 barrels per day.

Separately, the proposed Pathways carbon capture and storage network, previously estimated to cost $16.5 billion, would represent a major decarbonization investment by Canada’s largest oilsands producers. The network would include a 400-kilometre pipeline connecting oilsands facilities to an underground storage hub near Cold Lake.

In a broader energy memorandum of understanding (MOU) signed by the federal and provincial governments in November, the two sides agreed to prioritize the Pathways project and a proposed bitumen pipeline to the West Coast, saying the two projects are “mutually dependent” on each other proceeding.

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They also agreed to hammer out a trilateral MOU — part of a number of agreements contained in the broader deal — with the Oil Sands Alliance and the two governments by April 1.

“Specifically, what we want to ensure is that the MOU comes out with a policy that provides that economic viability for these long-term projects that will fill an export pipeline going to the West Coast,” said Stauth.

“I’m confident that a deal can be struck between the governments, and I think what’s most important is they do have a deadline for the timing, and we’ll see if that comes to fruition.”

However, work on the carbon capture network has been going on for more than four years, and the producers — including Canadian Natural Resources, Suncor Energy, Imperial Oil and Cenovus Energy — have not yet made a final investment decision.

Alliance members have said they need enhanced government incentives before giving the development the green light.

The oilpatch wants changes to the federal industrial carbon levy, saying it should be repealed to allow provinces to set the regulations.

“What it really means is we’re waiting for the outcomes of that agreement, and we are not prepared to move ahead until we can see the end results of the MOU that will allow for improved regulatory approval processes,” Stauth added.

Keith Stewart, Greenpeace Canada’s senior energy strategist, said he views the decision as part of talks between industry and both levels of government.

“This looks to me like a negotiating tactic,” he said.

With the April 1 deadline looming on the talks between industry and government, Canadian Natural Resources’ decision to defer the spending is telling, added analyst Menno Hulshuf with TD Cowen.

“It is a very simple message (from Canadian Natural that) we can’t deploy capital on this scale unless we are 100 per cent certain what this is going to look like over the next several decades.”

Oilsands production has grown incrementally over the past decade, but one of the barriers to building major new oilsands projects — along with the outlook for commodity prices — has been a lack of sufficient pipeline capacity to significantly grow volumes.

A number of proposed projects to optimize existing pipelines, along with Alberta’s proposed greenfield West Coast pipeline, will require anchor developments like Jackpine to proceed, said Jonah Resnick, principal research analyst at energy consultancy Wood Mackenzie.

With recent changes in Venezuela’s oil sector and the ongoing war on Iran, the world’s energy universe is shifting rapidly.

“You have major questions on major oil-producing nations in OPEC, like Venezuela and Iran, and then you have the MOU — there are still question marks on what exactly is going to come out of that,” Resnick said.

“In order to feed some of these pipelines, you really need to have significant capital investment. And I think that’s the main concern looking at the announcement today.”

Speaking in Calgary last month, federal Natural Resources Minister Tim Hodgson said the government has every intention of hitting the April 1 deadline.

Under the energy pact, the province and Ottawa also said they would reach an agreement by April that would see Alberta’s industrial carbon price ramp up to an effective rate of $130 per tonne.

“We are working closely with Alberta to fulfil the potential of the MOU, and our government will have more to say on this in the near future,” Charlotte Power, press secretary for the federal resources minister, said Thursday.

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com

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