Utah oil sands mine slowed

A Canadian company developing an oil sands mining and extraction project in Utah has announced a decision to "reduce the pace of field construction in order to maintain working capital flexibility," based on low oil prices.

Oil sands, also known as bituminous sands or "tar sands", are loose sand or partially consolidated sandstone saturated with a viscous form of petroleum called bitumen.  US Oil Sands Inc. is a Calgary-based company that describes itself as "focused on oil sands exploration and production in Utah."  Its wholly owned United States subsidiary US Oil Sands (Utah) Inc. has bitumen leases covering 32,005 acres of land in Utah’s Uinta Basin.

US Oil Sands' PR Spring Project area consists of 5,930 contiguous acres near the East Tavaputs Plateau in Utah.  According to the company, construction of Phase 1 of the PR Spring Project is approximately 85% complete with costs coming in below budget.  If completed, it would be the first U.S. oil sands mine to enter commercial production.

While the company has not yet entered production, US Oil Sands has described a proprietary extraction process using a citrus-based bio-solvent to extract bitumen from oil sands without the need for tailings ponds.  The company pitched this technique as different from traditional Canadian oil sands production in Alberta, where wastewater management is a controversial environmental challenge.  But the Utah proposal has drawn concern over impacts to groundwater flowing under the Book Cliffs

But the company said it conducted a detailed review of the project "in light of continued low oil prices and the closure of two key contractors’ Utah-based operations."  Specifically, the press release stated, "The low price environment has impacted the Project as two of the Company’s key contractors have closed their operations in Utah and have caused delays to the Project."  Indeed, spot prices for West Texas Intermediate have ranged near $30 per barrel in recent days, with U.S. crude futures falling below $30 earlier this year for the first time since 2003.  The press release also mentions that $10 million in previously-announced royalty financing had not closed, causing the company to explore other options including equity financing.

According to the press release, project work on the PR Spring Phase 1 project will continue at a reduced level, with an expected focus on "critical path items and areas that will lead to the most efficient restart of full construction operations in the future. In spite of delays and increased costs that will occur with restart of full construction operations, the Company is still targeting completion within the original US$60 million approved budget."

How will US Oil Sands survive the low oil price environment?  How will economic, environmental, or other factors affect the fate of Utah oil sands mining?

US holds first offshore wind site lease auction

Yesterday the U.S. Department of the Interior held its first competitive lease sale for renewable energy on the Outer Continental Shelf.  With a total bid of about $3.8 million, Deepwater Wind New England, LLC won the rights to lease two parcels covering 164,750 acres offshore Rhode Island and Massachusetts.  What do the auction results mean?

Consistent with President Obama's climate action plan, the Interior Department is promoting the use of federal lands for the production of renewable electricity.  Yesterday's auction represents the first competitive auction for leases for offshore wind sites in federal waters.  Following significant stakeholder process, the Interior Department identified and refined the parcels off Rhode Island and Massachusetts, and solicited interest in leasing sites.  In June, the Interior Department announced that nine companies were legally, technically, and financially qualified to participate in the auction.

The auction took place in two phases in late July.  First, a panel met to consider non-monetary factors, including whether any bidders held agreements that could make their project a more realistic success.  For example, bidders demonstrating a power purchase agreement or joint development agreement could score bonus points enabling them to compete against higher monetary bids.  Deepwater Wind's joint development agreement with the State of Rhode Island thus gave it an advantage in the second round held on July 31.  This round took a more traditional auction format, with bidders placing a series of increasing bids until only one bidder remained for each parcel.

Three bidders participated in the auction: Deepwater Wind New England, LLC, Sea Breeze Energy, LLC, and US Wind Inc.  After 4 rounds, Deepwater Wind had won the south parcel for $94,153, and only one other company remained in the competition for the north parcel.  By round 11, Deepwater Wind had won the north parcel with a bid of $3,744,135.

With the auction completed, Deepwater Wind has 10 days to execute the lease agreements.  Its first rent under the leases will be due in 45 days.  Lease fees for the sites will be charged at $3 per acre, and if Deepwater Wind develops an operating project, it will also pay an annual fee roughly equal to 2% of its wholesale energy market revenues.

Building on this first auction, the Department of the Interior plans to hold a second auction for sites off Virginia in September.  Eight bidders have been deemed qualified to participate in the Virginia auction.  How many bidders will actually participate in the auction?  How much competitive interest will arise?  For what price will the parcels' lease rights sell?  Will the leases - whether off Rhode Island and Massachusetts, or off Virginia - lead to operating offshore wind projects?  Time will tell how the 2013 offshore wind lease auctions affect U.S. energy development.