Calendar An icon of a desk calendar. Cancel An icon of a circle with a diagonal line across. Caret An icon of a block arrow pointing to the right. Email An icon of a paper envelope. Facebook An icon of the Facebook "f" mark. Google An icon of the Google "G" mark. Linked In An icon of the Linked In "in" mark. Logout An icon representing logout. Profile An icon that resembles human head and shoulders. Telephone An icon of a traditional telephone receiver. Tick An icon of a tick mark. Is Public An icon of a human eye and eyelashes. Is Not Public An icon of a human eye and eyelashes with a diagonal line through it. Pause Icon A two-lined pause icon for stopping interactions. Quote Mark A opening quote mark. Quote Mark A closing quote mark. Arrow An icon of an arrow. Folder An icon of a paper folder. Breaking An icon of an exclamation mark on a circular background. Camera An icon of a digital camera. Caret An icon of a caret arrow. Clock An icon of a clock face. Close An icon of the an X shape. Close Icon An icon used to represent where to interact to collapse or dismiss a component Comment An icon of a speech bubble. Comments An icon of a speech bubble, denoting user comments. Ellipsis An icon of 3 horizontal dots. Envelope An icon of a paper envelope. Facebook An icon of a facebook f logo. Camera An icon of a digital camera. Home An icon of a house. Instagram An icon of the Instagram logo. LinkedIn An icon of the LinkedIn logo. Magnifying Glass An icon of a magnifying glass. Search Icon A magnifying glass icon that is used to represent the function of searching. Menu An icon of 3 horizontal lines. Hamburger Menu Icon An icon used to represent a collapsed menu. Next An icon of an arrow pointing to the right. Notice An explanation mark centred inside a circle. Previous An icon of an arrow pointing to the left. Rating An icon of a star. Tag An icon of a tag. Twitter An icon of the Twitter logo. Video Camera An icon of a video camera shape. Speech Bubble Icon A icon displaying a speech bubble WhatsApp An icon of the WhatsApp logo. Information An icon of an information logo. Plus A mathematical 'plus' symbol. Duration An icon indicating Time. Success Tick An icon of a green tick. Success Tick Timeout An icon of a greyed out success tick. Loading Spinner An icon of a loading spinner.

The end of a megaproject oil sands era

Post 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 45 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 ($18 billion) this year while overall 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.

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.

Recession Likely

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.

“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.

Projects Resurrected

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.

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.

Death’s Door

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.”

Recommended for you

More from Energy Voice

Latest Posts