KNM ... Jun11

Its plans for oil sand production a few year ago failed to materialize when crude oil prices fell to about US$30 a barrel at the end of 2008. Oil sand production was deemed not viable owing to the high production cost involved, of about US70 a barrel.

But now that crude oil prices have climbed to more than US$120 a barrel, it makes commercials sense for KNM to resume oil sand production.

The rising demand for oil sands augurs well for KNM. KNM’s oil sand plant in Canada, which was completed in Aug 2008, should see an improvement in its utilization rate. This will boost the company’s earnings.

It is an alternative way to secure oil resources, given the depleting conventional oil reserves.

Oil sands are a type of petroleum deposit that can be found across the globe. Canada and Venezuela are said to have huge deposits. These deposits are seen as a portion of global oil reserves as the costlier crude oil and new technology allow oil sands to be extracted profitably.

KNM executive chairman and CEO Lee is the largest shareholder in KNM with a combined indirect stake of 22.72% as at Dec 2010.

Owing to the poor demand for oil sands caused by the plunge in crude oil prices during the global financial crisis, the company decided to convert the plant to undertake service related jobs.

In April 2011, Moody’s Investors Service expect sustained interest from oil majors to develop unconventional hydrocarbon reserves, such as oil sands and shale gas, as high oil prices have made them commercially viable. However they also involve higher development risks owing to cost overruns, delays and technological challenges.

The possible revival of KNM’s oil sand project could be the wildcard to give the company’s earnings a boost.

In May 2011, KNM had secured a rm218 million contract from Russian oil and gas major. In Nov 2010, it secured a US$216 million gas condensate project in Uzbekistan. It has an order book of rm5.4 billion.