Financial Post: “Canadian oil companies are ruthlessly enforcing capital discipline as project costs creep up and shareholders pressure management to focus only on the most profitable ventures.”
“Suncor Energy Inc. announced a billion-dollar cut for the rest of the year even though the company raised its oil price forecast.
Others such as Athabasca Oil Corp., PennWest Exploration Ltd., Talisman Energy Inc. and Sunshine Oil Sands Ltd. are also cutting back due to a mix of internal corporate issues and project uncertainty. Cenovus Energy Inc. is also facing cost pressures at its Foster Creek oil sands facility.
“Given that the low-bearing fruit have already been developed, the next wave of oil sands project are coming from areas where geology might not be as uniform,” said Dinara Millington, senior vice president at the Canadian Energy Research Institute.
The global oil industry is gripped with the cost-cutting fever amid shareholder pressure, but the oil sands are particularly vulnerable given their baked-in higher development costs, high wages, remote location and infrastructure challenges. In May, France’s Total SA shelved an $11-billion oil sands mine project planned with joint venture partners Suncor, Occidental Petroleum and Inpex Canada.
“Oil sands are economically challenging in terms of returns,” said Jeff Lyons, a partner at Deloitte Canada. “Cost escalation is causing oil sands participants to rethink the economics of projects. That’s why you’re not seeing a lot of new capital flowing into oil sands.”
Existing in-situ oil sands projects in Alberta are produced at a break-even cost of US$63.50 per barrel on average, while integrated oil sands mining projects have a breakeven cost of US$60 to US$65, including a 9% after-tax return, compared to the Saskatchewan Bakken’s US$44.30 a barrel cost.
SAGD operations saw a 5.1% jump from 2011 to 2013 on average, while mining and extraction was up 6.1% and integrated mining and upgrading 7.9% during the period, CERI data shows. Last December, Canadian Natural Resources Ltd. and the Alberta government revised cost estimates of their 50,000-barrels per day upgrading project by 49%.
….The trend of cost rationalization is not unique to the oil sands and rippling across the global industry thanks to the “abundance” of assets, according to Barry Munro, oil and gas leader at Ernst & Young.
“It’s not about scarcity of resources anymore. Companies are realizing they have far more assets than they are ever going to have capital to be able to exploit — they feel they have to structurally change their business model.”
Indeed, business plans are in a state of flux. Oil and gas deals in Canada rose 23% in the first half of the year, according to management consultancy Deloitte LLP, but much of the activity took place outside the oil sands sector.
….A recent report by London-based Carbon Tracker Initiative estimated that a number of oil sands projects would be economically impractical at oil prices below $130 per barrel.
RBC Capital, which is confident that the existing oil sands players will meet their production targets profitably, estimates the industry will require between $26-billion to $33-billion each year to maintain existing production and raise output by an additional 250,000-bpd annually till the end of the decade.
….But the Canadian industry is fighting hard to remain a competitive jurisdiction.
A shift towards smaller in-situ projects that allow more flexibility capital and skilled labour is helping rein in costs, CERI said in its report.
….While technology and friendlier regulations will help rein in costs, the external challenges facing the industry remain formidable.
Apart from the well-documented transportation challenges, high labour costs and lack of other infrastructure could impede development, as would a sudden drop in oil prices. Brent and WTI has been trending lower amid high inventories and a slowdown in Europe.
“Oil sands projects that are already producing will be okay… but projects that are approved but haven’t started construction, and projects that have just only been announced are definitely at risk — at various degrees of riskiness,” Mr. Millington said.”
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