Driving down cost per barrel

Oilsands firms have embraced technology and replication to lower the cost of producing each barrel of oil from the region’s bitumen reserves. projects do,” Findlay said in an interview.

But some observers may have been too quick to write off the oilsands. Recent improvements in operating costs and break-even prices suggest a deep structural shift is underway, offering a crack of sunlight for producers. While major new oilsands developments are on the whole more costly than competitors, recent expansions are coming online at a fraction of the cost from just a few years ago.

The latest 80,000-bpd expansion of Canadian Natural’s Horizon development will require a West Texas Intermediate price as low as the low-to-mid US$20 range, according to GMP FirstEnergy estimates.

The Syncrude Canada project operated by Suncor, and Canadian Natural’s Athabasca Oil Sands Project, which it recently purchased from Royal Dutch Shell PLC, are both reducing costs rapidly and are viable around the low US$30-perbarrel range, according to GMP FirstEnergy. The best wells in U.S. shale basins, by comparison, typically require US$30 to US$35 WTI prices.

GMP’s Dunn says the improvements are partly a result of improved well-pad designs and other efficiencies, which have begun to trickle down into companies’ earnings reports.

Companies have also taken an axe to slash their running costs. Operating costs at Cenovus’s Christina Lake venture averaged $7.04 per barrel in the second quarter of 2017, according to Wood Mackenzie research. MEG’s nearby steam-driven project, also called Christina Lake, averaged $7.42 per barrel.

Meanwhile, Suncor’s Williams is pushing his company to reach the “ambitious target” of reducing operating costs across its operations to below $20 per barrel in the medium-to- long-term, compared to $28.28 at its Millenium and North Steepbank mines in the second quarter of 2017, according to Wood Mackenzie research.

“We’re still working toward it, but I can see us getting there,” Williams said on a recent conference call with analysts.

Even so, operating costs are only part of the picture. Cost overruns during the oil boom left oilsands companies with enormous capital investments that will take years to pay down, and analysts are careful not to overstate the shift.

New developments now coming online were commissioned when oil prices were around the US$100 mark, and would never be approved in today’s environment. Many proposed oilsands expansions remain on hold, while companies instead focus on repairing damaged balance sheets.

Much of the recent cost reductions were also achieved through avenues that are now exhausted, such as downsized workforces or cheaper contractor rates. Producers have also been aided by a weak Canadian dollar and the higher price for heavy oil relative to U.S. crude benchmarks, both of which seem unlikely to last.

Canadian Natural’s giant Horizon complex was $1.9 billion over budget in its original phase of construction. Capital costs at Imperial Oil’s Kearl Lake mine ballooned from its initial estimate of $7.9 billion to $12.9 billion, due to snags in the shipment of materials to site.

That hasn’t stopped major domestic operators from doubling down on northern Alberta’s bitumen deposits and snapping up around $30 billion in assets since the beginning of the 2017.

“Such counter-cyclical investments, though difficult to stomach at the time, have historically proven fruitful,” Findlay wrote in the Oxford Institute report, noting that despite numerous headwinds for the industry, “oilsands producers and investors have a number of reasons to feel sanguine.”