‘SIGNIFICANT FUTURE’ AWAITS OILSANDS AS LONG AS COMPANIES TAKE RIGHT STEPS
At the ripe old age of 50, have the Canadian oilsands finally peaked, progressing into middle age and the slow toboggan ride downhill?
Don’t count Cenovus Energy chief executive Brian Ferguson in this camp. He believes the oilsands are entering a “renaissance” that will see costs come down and production go up as the escalating effects of innovation and technology take hold.
“You saw an incredible renaissance from 2010 to 2014 that has generated the success and the significance of the U.S. unconventionals, the tight oil,” he said on a conference call last week.
“It’s my belief that (from) 2016 to 2020 that the oilsands have that same opportunity for a renaissance.”
As the head of one of Canada’s largest oilsands producers, Ferguson saw the company move ahead with one deferred project in December — the Christina Lake Phase G development — that had been put on the back burner by the collapse of oil prices a couple of years ago.
It is now eyeing two other projects for possible reactivation; more info about its Foster Creek Phase H project and Narrows Lake Phase A development will be coming in the summer.
Ferguson believes the new era for the oilsands will be propelled by the application of technology, such as the use of solvents in thermal projects, innovation around improved business processes, better reservoir management, increased use of data analytics and more automation.
“I’m really excited about that opportunity and a renaissance, in the sense of really a re-awakening that the oilsands is the thirdlargest oil resource on the planet and it’s in a fiscally and environmentally responsible jurisdiction,” he said in an interview.
The use of solvents in thermal projects is showing promise in oilpatch pilot projects and some companies are already planning on commercial applications.
If approved, the Narrows Lake project would not only use steam-assisted gravity drainage (SAGD) to coax bitumen out of the ground, but butane to help thin the oil, lowering emissions.
Imperial Oil is also planning commercial oilsands projects in the Cold Lake area that would use a solvent-assisted SAGD process. It says solvents will lower emissions intensity by 25 per cent.
The oilsands sector, however, faces several obstacles ahead.
Crude prices remain below US$55 a barrel and it’s unlikely any mines will be sanctioned in the next few years without a significant price spike.
As Suncor CEO Steve Williams told analysts earlier this month: “Mining investments are coming to an end — not just for Suncor, but for the industry, I believe — for a considerable period, probably in excess of 10 years.”
There’s also tough competition for investment capital from tight oil plays. The U.S. Energy Information Administration reported this week that American oil production rose for two consecutive months in October and November and increased drilling continues in the Permian area.
Environmental regulations are getting tougher and a 100-megatonne emissions cap has been imposed on the oilsands sector.
Yet, even with tough competition and the oil price downturn, the oilsands have continued to expand, fuelled by projects put into action years ago and the need by U.S refiners for heavier grades of crude.
In a report issued this month, the Canadian Energy Research Institute (CERI) projects oilsands output will peak at 5.5 million barrels per day by 2036 under its mid-case forecast, up from 2.5 million barrels in 2015.
It notes supply costs for thermal projects have fallen by 27 per cent since 2015 and six per cent for oilsands mines. To meet these costs, SAGD projects would need West Texas Intermediate crude oil prices at US$60.52 a barrel and $75.73 for mines, according to CERI. But far from seeing investment drive up, it projects significant spending lies ahead, even as companies shift money away from new mines and greenfield projects to more thermal expansion developments.
While total oilsands spending peaked at $58 billion three years ago, CERI says rising crude prices should see investment levels recover to $58.5 billion in 2021. More money will be directed toward operating spending over time and away from new capital expenditures.
“There is a significant future as long as the industry is able to look at ways to cut down the costs of production and the environmental footprint, such as the greenhouse gas emissions,” says report author Dinara Millington, CERI’s vice-president of research.
“Outside of oil prices and market access, I think technology and innovation in extracting the bitumen is going to be the saving grace of the oilsands.”
For the province, this new phase in the oilsands evolution will still mean substantial revenues for government coffers.
Bitumen royalties dropped sharply with the oil price downturn to only $1.2 billion last year. CERI predicts as oil prices recover, the province will collect $55 billion in cumulative bitumen royalties by 2021.
If global oil demand rises and prices recover as forecast by the IEA over the next two decades, more oilsands projects will shift
It’s my belief that (from) 2016 to 2020 that the oilsands have that same opportunity for a renaissance.
out of the lower pre-payout royalty rate into a higher payment tier.
For the provincial treasury, that should mean annual bitumen royalties will climb to an eye-popping $61.5 billion by 2036, more than the entire amount of revenue the province will collect this year.
Now, price forecasts are fickle and the future demand for oil could be reshaped by any number of factors. But with companies reactivating deferred projects and pondering future expansions, the glory days of the oilsands aren’t over yet.