CALGARY (CP) -- Petro-Canada's [NYSE:PCZ; TSX:PCA] existing oilsands projects remain viable despite higher Alberta royalties, but exploration spending will shift into other areas including the U.S. Rockies and the eastern Arctic, says chief executive Ron Brenneman.
While the economics of Petro-Canada's oilsands developments at MacKay River and Fort Hills will be affected by the province's overall C$1.4 billion royalty hike announced in October, ''it's not sufficient to really impair the overall viability of them,'' Brenneman told investors in Edmonton.
''At least at this point they still look like pretty solid projects and I think that's because, for the most part, we're dealing with very high quality resources and very good projects and they're the ones that should survive in the new royalty regime.''
Petro-Canada is set to announce its 2008 capital expenditure program next month. Brenneman said there will certainly be less spending on oil and gas projects in Alberta - a shift he said has been accelerated by the new royalty framework.
''The exploration investments that we might have otherwise made are no longer economic,'' he said.
Petro-Canada is now looking into exploration in the U.S. Rockies, Libya, the Baltic Sea and Eastern Canada among other regions.
''There's a lots of things there for us to chew on. We're just trying to prioritize them right now and figure out which ones we want to try to advance,'' he said.
Brenneman said he's most excited by the prospect of tapping into the estimated 12 trillion cubic feet of natural gas Petro-Canada owns in the eastern Arctic.
''This makes a pretty ideal LNG (liquefied natural gas) project,'' Brenneman said, adding a small team has been looking into the feasibility of the gas field.
There are a number of environmental, technological and regulatory hurdles, Brenneman said, but ''this is a project that I think makes a lot of sense from a resource point of view, from Canada's point of view.''
Petro-Canada will be able to fund its growth projects thanks to an expected increase in cash flow from some of its downstream businesses - namely from its Edmonton and Montreal refineries.
''Certainly the cash flow that's generated from those two projects is as good - and often better - than the cash flow from equivalent upstream projects,'' Brenneman said.
Petro-Canada is currently making changes to its 190,000 barrel per day refinery near Edmonton that will allow it to process oilsands feedstock exclusively, instead of conventional light crude. Construction on that project, which will cost C$2 billion, is set to wrap up in the second quarter of next year.
The Edmonton Refinery conversion is expected to add another C$300 millions to C$350 million in cash flow to Petro-Canada's bottom line.
Petro-Canada is also thinking about adding a coker to its Montreal LNG refinery, which would likely be completed in 2009. After that, it's could add about C$130 million in cash flow.
The company has approval from the Quebec government and it will make a final decision on whether to go ahead with the coker in the coming weeks.
The company had to revise the expected cost of its Montreal coker to C$1 billion from the C$600 million estimate made two years ago.
''That's the higher range of our original guidance, but the economics continue to look very solid,'' said Dan Sorochan, Petro-Canada's vice-president for refining and supply.
Labour issues have been hampering the Montreal refinery in recent months. Members of the Communications, Energy and Paperworks Union local 175 took a strike vote in September and on 17 November, Petro-Canada locked out its unionized workers.
''We were living in a period of great uncertainty there, and you can't run a facility that way,'' Sorochan said, noting that the employees could have walked off the job on 12 hours notice.
He said the hope was that the lockout would help ''clear the air'' so that negotiations could get back on track, but that hasn't happened yet. The plant is now being operated by management.
Petro-Canada shares closed at C$49.11 Wednesday afternoon on the Toronto Stock Exchange, a 39 cent decrease over Tuesday.
(c) The Canadian Press 2007