Oil-Sands Megaproject Era Wanes as Suncor to Imperial Scale Down

Oil-Sands Megaproject Era Wanes as Suncor to Imperial Scale Down
Canadian oil-sands spending is poised to drop 30% to $19B this year while total oil production will be 17% lower by 2030 compared with last year's estimates.

(Bloomberg) -- 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 46 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 ($19 billion) this year while total 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.

Recession Likely

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.

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.


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Copyright 2016 Bloomberg News.


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