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Oil-Sands Megaproject Era Wanes

Oil-Sands Megaproject Era Wanes thumbnail

The era of the megaproject in Canada’s oil sands is fading.

Crude’s price slump, pressure to get off fossil fuels and tax increases in Alberta are adding to high costs and a lack of pipelines, prompting producers from Suncor Energy Inc. to Imperial Oil Ltd. to accelerate a shift to smaller projects.

Companies are deferring new mines in favor of cheaper, bite-sized drilling programs that deliver quicker returns and require less labor. The moves will help reduce cost overruns and make Canadian companies more competitive with U.S. shale producers. The trade off will be reduced production growth and a smaller economic boost for the country’s oil patch.

“Capital likes certainty and it’s a bit of an uncertain world at the moment,” Steve Williams, Suncor’s chief executive officer, said June 10 in an interview at Bloomberg’s Calgary office.

With crude about 46 percent below last year’s level, companies globally have delayed or scrapped about $200 billion in big projects in recent months, according to a June 16 report from Ernst & Young LLP. Canadian oil-sands spending is poised to drop 30 percent to C$23 billion ($19 billion) this year while total oil production will be 17 percent lower by 2030 compared with last year’s estimates, according to a report this month from the Canadian Association of Petroleum Producers.

Recession Likely

After the C$13 billion Suncor-led Fort Hills mine starts operating in 2017 to produce 180,000 barrels a day over 50 years, the company plans to drive growth with one drilling project each year of 30,000 to 40,000 barrels a day from 2019 to 2029, Williams said. “I don’t see the next mine being built quickly,” he said.

In February, Royal Dutch Shell Plc withdrew an application to build the 200,000 barrel-a-day Pierre River mine to focus on its existing oil-sands operations. The company in May deferred by two years Carmon Creek, a drilling project slated to produce 80,000 barrels a day.

“That all makes perfect sense in an environment where people think the price may not be as high and might be more variable,” said Mike Tims, vice chairman of Calgary-based Matco Investments Ltd.

Energy producers are also bracing for stricter climate rules that could include carbon pricing after Group of Seven nations committed to cutting emissions from fossil fuels to zero by 2100. Canadian producers have cut thousands of jobs, setting Alberta up for a recession this year, according to the Conference Board of Canada.

Political Uncertainty

Alberta’s recently elected New Democratic Party government has added another layer of uncertainty, saying this week it would push ahead with a tax increase for corporations and review oil and gas royalties.

The plan is weighing on producers’ shares. The Standard & Poor’s/TSX Energy Index has dropped 10 percent since the beginning of May, while the S&P 500 Energy Index of U.S. peers has fallen 7 percent.

The transition to smaller so-called in situ projects started before the price crash, with low natural gas prices making extraction through drilling cheaper. The fuel is used to heat water into steam that’s pumped underground to melt bitumen through steam-assisted gravity drainage, or SAGD.

Total SA shelved a C$11 billion plan to build the 160,000 barrel-a-day Joslyn mine in May 2014, citing high costs, while expanding its Surmont in situ project which it owns with ConocoPhillips.

Less Workers

“The oil sands, and I’m talking about in situ, is moving toward more bite-sized modules, replication again and again and again, which allows you to strip out engineering costs,” Rob Peabody, chief operating officer of Husky Energy Inc., said this month at an RBC Capital Markets conference in New York.

Imperial is planning oil-sands drilling projects that will be resilient to price volatility to fuel growth past 2020 after the expansion of its Kearl mine, Paul Masschelin, senior vice president of finance, said at the conference.

In situ projects require a fraction of the workers as mines, both for construction and operation. About 430 workers operate Cenovus Energy Inc.’s Foster Creek in situ project, which produces about 136,000 barrels of oil a day. Syncrude Canada Ltd.’s oil-sands mine and upgrader, with 2.2 times the crude output and an operation to turn bitumen into light oil, has about 8,500 workers on site.

Rise Again

Still, the rise of in situ means those projects accounted for 28 percent of workers employed in the oil sands in 2014, versus 21 percent for mining and 20 percent for upgrading, according to a May 2014 report by the Petroleum Labour Market Information division of Enform.

Mining megaprojects under way are proceeding because so much has already been invested, said Sam La Bell, an analyst at Veritas Investment Research in Toronto. Suncor’s Fort Hills was never economic, he said.

Fort Hills will be profitable and Suncor has managed risk by sharing costs with Total and Teck Resources Ltd., Williams said. The company forecasts a 13 percent internal rate of return over the project’s life.

Canadian oil-sands megaprojects have been pronounced at death’s door before only to be resurrected as the price of crude rises again. Suncor advanced Fort Hills in 2013 after an investment decision was deferred over low oil prices and high costs in 2008 by Petro-Canada, which Suncor later acquired.

Mines will still contribute to production growth over the next 15 years, according to CAPP, accounting for 38 percent of the additional 1.8 million barrels a day by 2030.

“New oil sands projects, especially the mining projects, are very difficult,” said Amir Arif, an analyst at Cormark Securities Inc. in Calgary. “It’s hard to make the economics work.”


8 Comments on "Oil-Sands Megaproject Era Wanes"

  1. Apneaman on Sat, 20th Jun 2015 3:29 pm 

    Sneak Peek: New Oilsands Documentary Due Out This Fall

  2. BobInget on Sat, 20th Jun 2015 7:36 pm 

    The really big scandal oil sands story, Orinoco, Venezuela. THE biggest oil sands stash in the world, 265 Billion Barrels.

    Fifteen Billion loan to dig in Venezuela’s oil sands.

    Watch Video too:

    The Russian take:–source/523934.html

  3. BobInget on Sat, 20th Jun 2015 7:44 pm 

    That ‘Oil’ Video is spam. I was mistaken for recommending.
    Sorry, I thought the Video was about Venezuela.

    Beware of so called ‘easy money’.

  4. dave thompson on Sat, 20th Jun 2015 11:47 pm 

    Net usable for the “consumer” petrol is not available from tar sands.

  5. Makati1 on Sun, 21st Jun 2015 12:29 am 

    “Mines will still contribute to production growth over the next 15 years, according to CAPP, accounting for 38 percent of the additional 1.8 million barrels a day by 2030.”

    Quick! Tell me what the price of oil will be in 2030! Don’t know? Then how can the above statement be true? More pimping for the sinking ship Petroleum Industry as the rats begin heading for the exit?

  6. penury on Sun, 21st Jun 2015 2:22 pm 

    People have a bias to believe that what is normal today will still be normal in xx number of years. Barring normalcy the usual situation for a thousand years has been towards greater wealth and less stress for all. People cannot (will not)accept that as growth has led to this point, from here on it appears that less will become more and growth will never occur at levels previously enjoyed. Therefore all predictions are essentially garbage. Esp further out than 2 years and those are suspect.

  7. Makati1 on Sun, 21st Jun 2015 8:00 pm 

    penury, so right.

  8. Kenz300 on Mon, 22nd Jun 2015 7:13 am 

    No need for the Keystone pipeline…………….

    The high cost producers are drowning in debt..

    It is time to transition to safer, cleaner and cheaper alternative energy sources and away from fossil fuels.

    For Faithful, Social Justice Goals Demand Action on Environment – The New York Times


    Renewable Energy Responsible for First Ever Carbon Emissions Stabilization – Renewable Energy World

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