Blogs & Comment

Why Opti went bankrupt

The oilsands producer's creditor protection shows why most operators stick with the tried, true and "dirty."

Chris Slubicki, president and CEO of Opti Canada, addresses the company’s annual meeting in Calgary on April 27, 2011. (Photo: Jeff McIntosh/CP)

On July 13 Opti Canada Ltd. announced it was entering creditor protection whereby bondholders traded $1.75 billion of debt for $375 million of new equity. Given the shares trade in the pennies, they effectively control the company.

So what went wrong here? Aren’t the oilsands booming? They are. Opti had at least two big problems other operators don’t have, technology and lack of diversification. It promised to bring a new technology to the industry developed in Israel. It was a modified steam-assisted gravity drainage (SAGD) technology that, instead of burning natural gas to create steam to inject into the oilsands layer and thus “melt” the bitumen (heavy oil) away from the sand (as some experts describe it, burning a clean fuel to create a dirty one), it would burn a bituminous byproduct of the upgrading process in a closed loop. Apart from the obvious environmental benefits, this made a lot of economic sense pre-2008 when natural gas was expensive and looking to get more so.

Now gas is cheap, making tried-and-true SAGD operators like Imperial Oil and Cenovus highly profitable. Meanwhile the Long Lake project, based on Opti’s technology, which came online in late 2008, is struggling at less than half its intended capacity. In retrospect Opti and operating partner Nexen Inc. rushed construction of a full-scale plant before they’d worked out the technical bugs, which have been exacerbated by unexpected inconsistency of the underlying oil reservoir. Meanwhile any cost advantage of avoiding gas inputs evaporated. Now they’re building a gas line to the facility to “maximize” steam production.

The reason why Nexen, which owns 65% of Long Lake to Opti’s 35%, isn’t in similarly dire straits relates to diversification. Long Lake is a relatively small part of Nexen’s global asset portfolio. For Opti, it’s the only cash flow generator.

The entire industry is well aware of the need to pioneer new technologies that will mitigate the environmental drawbacks of oilsands mining and SAGD. Unfortunately, this is one that isn’t working out, and only encourages companies to eschew the lab experiments and stick to the tried, true and “dirty.”