Total's Joslyn Exit Doesn't Jeopardize Near-Term Growth
Within the past few weeks, French oil and gas supermajor Total S.A. announced that it is indefinitely suspending the development of the $11 billion Joslyn mine in the Canadian oil sands region. The suspension of this project naturally means that Total will not be able to generate any production growth that may have come from it.
Total will not be the only company that will be affected by this decision, either. Canada's Suncor Energy was the lead company in a joint venture to develop the area that also included Occidental Petroleum and Inpex Canada . Total's withdrawal from Joslyn means that none of these companies will see the production growth that would have resulted. Ultimately, however, the decision to put it on hold may have been the right decision.
The Joslyn North Mine project is a development project taking place in Canada to extract approximately 874 million barrels of extremely heavy crude oil from the Canadian oil sands in northern Alberta over a 20-year period. Notice that unlike most oil development projects, this project is described as being a mine. That is because the crude oil found at this location is in the form of bitumen, an extremely heavy form of crude oil that is similar to asphalt. Because of this, the oil that is found at the Joslyn North Mine generally does not flow or flows so little that it is pointless to attempt to remove it using a conventional oil well. Because of its relatively solid state, it has to be removed in the same way that any other solid resource would: through mining.
Higher costs to access the oil
This process is considerably more expensive than more conventional methods of extracting oil. Therefore, it necessitates that the companies producing this heavy crude secure a higher price for the oil in order to make the heavy oil sands oil economical to produce. Unfortunately, in this case, oil prices for Canadian heavy crude are still too low for this project to make sense for the company. The price that Total would get for the oil that it extracts from the mine is so low that the company would make little to no profit extracting it. Total might even lose money producing here.
Suspension looks like a smart move
Because of these poor economics, deciding to put the Joslyn Mine project on hold indefinitely was likely the right decision to make even though it reduces the forward production growth prospects for all four of the companies involved in the project.
This is because the company's first responsibility is to maximize shareholder profits. If Total cannot make money by developing the oil resources located at Joslyn, withdrawing from the project is the decision that will best allow it to maximize its profits. Not doing so would result in the company's profits and cash flow being decreased by the project instead of increased.
Near-term growth prospects remain
Total still has a number of opportunities to grow its production even without going forward on the Joslyn Mine project. The company is bringing a number of new projects online this year that are expected to increase its production of oil and gas by approximately 150,000 barrels of oil equivalent per day over 2013 levels.
That is not the end of the company's forward growth, either. Total will be bringing several other new projects online over the next few years that are expected to grow the company's average daily production by approximately 700,000 barrels of oil equivalent. This growth is expected to occur by 2017.
The Joslyn Mine project was not expected to start producing oil until 2020. Therefore, the suspension of this project does not affect the company's near-term growth prospects. While this will reduce Total's ability to grow its production into the next decade, it is likely for the best if it could not produce Joslyn's oil profitably. Ultimately, investors should be pleased with this development since it shows that management is only interested in growth that benefits the shareholders as opposed to growing the company at any cost.
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The article Total's Joslyn Exit Doesn't Jeopardize Near-Term Growth originally appeared on Fool.com.Daniel Gibbs has a long position in Suncor Energy. His research firm, Powerhedge LLC, has a business relationship with a registered investment advisor whose clients may have positions in any of the stocks mentioned. Powerhedge LLC has no positions in any stocks mentioned and is not a registered investment advisor. The Motley Fool recommends Total (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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