Sept/Oct 2010

Back in the black

Oil sands projects ready to grow again, but big changes needed to make it happen

By Gillian Woodford

Aurora Mine 

Shift change at Syncrude’s Aurora Mine | Photo courtesy of Syncrude Canada - Bob Nyen

After a grim year of low prices and shelved projects, the oil sands industry is not only officially in recovery but poised for major expansion. According to a recent report by energy analysis firm IHS Cambridge Energy Research Associates (CERA), Canada’s oil sands stand to become the largest supplier of oil to the US by 2030, taking as much as 36 per cent of the market.

However, the industry must leap a lot of hurdles before it is able to meet that demand. The main issues are project execution rates; environmental concerns (especially water supply and land reclamation); and labour costs. “These limits to growth need to be alleviated to meet this aggressive growth target,” says Jackie Forrest, director of global oil for IHS CERA. “There are technology and management changes that must be made.”

Supply and demand

Second-quarter results for 2010 have been by and large very good, but petroleum investors are still jittery after riding a roller-coaster of crude prices for the past two years. And although prices seem to have stabilized, nerves are still frayed.

“With a recession as hard and fast as we had, there’s a tremendous amount of confidence lost,” explains Oil Sands Developers Group (OSDG) president, Don Thompson. “But at the same time, capital costs remained high while crude prices fell. That’s a scary scenario for investors.”

But companies are again starting to take chances on new projects. “In 2010, about half the projects of the summer of 2008 are back on,” says Forrest. Some, like Imperial Oil’s $8-billion Kearl operation, are going ahead, taking advantage of lower operating costs. “The cost of a number of commodities — labour, steel, anything you can name — tend to be lower,” says Imperial spokesperson Pius Rolheiser.

Meanwhile, other companies are resuming expansion work planned before the crash. “The level of spending has rebounded, and today activity is approximately back to where it was,” says Thompson. “Capital expenditures went from some $30 billion in 2008 to about $15 billion last year,” Thompson notes. “We expect peak spending next year to be about $25 billion, with the peak year moved forward to 2013.”

Most analysts think US demand for oil probably reached its zenith in 2005 at nearly 20.8 million barrels per day (bpd). Analysts also expect that the US will remain the world’s biggest consumer of oil, well ahead of China, the second biggest oil importer. Canada is already the United States’ largest crude source, accounting for 21 per cent of oil imports. Most of this is from conventional sources, with about eight per cent coming from oil sands. With imports from other top suppliers such as Mexico and Saudi Arabia falling in recent years, and Canada’s conventional oil supply expected to diminish in the short term, the oil sands are set to fill the gap. Many companies have also expressed interest in supplying to China, which does not yet consume half of the oil as the United States.

There are talks of expanding and adding pipelines to carry the oil, and production growth has already begun. Despite the downturn, oil sands production reached about 1.35 million bpd in 2009, an increase of 14 per cent compared to that of 2008. The Canadian Association of Petroleum Producers forecasts 1.5 million bpd for 2010. CERA’s report predicts that by 2030 oil sands production will grow to 3.1 million bpd, in a moderate growth scenario, or as many as 5.7 million bpd if Canada chooses to “barrel ahead” with development. The growth figure would represent 36 per cent of anticipated American imports. In its annual report, Alberta’s energy regulator, the Energy Resources Conservation Board (ERCB), offers a slightly more aggressive projection of 3.2 million bpd by 2019.

If oil prices stay low, will the oil be worth extracting? Estimates vary hugely on the price per barrel the industry needs in order to remain profitable. It has become cheaper to extract bitumen from the sand, but it remains costlier than conventional drilling. Forrest says at US$65 per barrel she would not expect to see upgraded oil coming out of the oil sands, only upstream projects. “But we’ll still see some growth,” she adds.

The ERCB predicts that raw bitumen production will outstrip refining capacity in the coming years. In its annual report, the regulator estimates that just 1.3 million bpd of the 3.2 million bpd it projects for 2019 will be upgraded. The discrepancy reflects a lack of motivation in oil sands companies to invest in building upgrading facilities, despite the Alberta government’s efforts to convince them to do so. High construction and labour costs and a too-narrow profit margin are keeping most companies from adding upgrading facilities to their plans.

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