Oil-Sands Operators Bet on Local Advantage as US Partners Flee

(Bloomberg) -- Now that multinational energy producers have sold their stakes in Canada’s oil sands, local companies are hatching plans to make some real changes.

Cenovus Energy Inc. and Canadian Natural Resources Ltd. are betting they can exploit new technologies and their deeper understanding of Canadian-specific issues, such as environmental rules and relations with native communities, to profit from one of the world’s biggest hydrocarbon reserves without their former partners.

“The oil sands require a focus on environmental issues like carbon pricing, indigenous issues, things like that, that are very specific kinds of skills that companies need to have for Alberta, for Canada,” said Harrie Vredenburg, a professor at the University of Calgary’s Haskayne School of Business. “Some of the multinationals are not necessarily particularly suited to that. In all those things, it does favor the Canadian firms.”

Investors have reservations. Cenovus shares dropped 14 percent on March 30, the day after it agreed to buy ConocoPhillips’s stake in its oil-sands project, and some conventional assets, for $13.3 billion. While Canadian Natural’s shares gained, its bonds tumbled on March 9 after it struck a $9.42 billion deal with Royal Dutch Shell Plc and Marathon Oil Corp.

So far this year, non-Canadian companies have shed more than $20 billion in oil-sands assets.

Ironic Angst

The angst over the multinationals’ departure is ironic given that, in the first decade of the century, the concern was that non-Canadian firms were snapping up too much, Vredenburg said. Back then, oil prices were climbing toward $140 a barrel, talk of peak oil was rampant and producers were scrambling to find new reserves.

They looked to Canada’s oil sands -- a mixture of sand, water, clay and a tarlike hydrocarbon mix known as bitumen. The deposits rank as the third-largest reserve of crude oil in the world, with 165 billion barrels of recoverable oil, according to the Canadian Association of Petroleum Producers.

The sands had produced oil since the late 1960s, but it was expensive. The sand was dug up in open-pit mines, then trucked to a refining plant where the bitumen was separated out using hot water. But in a world that appeared to be running out of oil, multinationals were willing to bet that the operations would be profitable.

International investments helped the industry build the facilities needed to extract the oil and turn it into a form that could flow through pipelines. Over time, innovations such as steam-assisted gravity drainage, to get the bitumen to flow to the surface, helped lower costs and increase production. The oil sands produced about 2.4 million barrels per day in 2015, accounting for almost two-thirds of Canada’s output.

With the price of oil hovering between $50 and $55 a barrel this year, producers are searching for added efficiency. Operating costs for a steam drainage project, excluding some items, were about C$7.53 a barrel last year, according to a study from the Canadian Energy Research Institute. That’s down 32 percent from C$11.15 in 2011.

While some of the improvements have come from lower labor costs and may be temporary, companies also have made permanent changes, such as improving their well-pad designs and moving processing units closer to production sites, said Dinara Millington, author of the Canadian Energy Research study. New techniques, like injecting wells with chemicals that dissolve the bitumen so that operations require less steam, could save as much as an additional 40 percent, she said.

“Not only would these technologies address the emissions and overall environmental footprint, but we also could see significant supply-cost savings,” Millington said in an interview.

The companies have a “remarkable” opportunity to further reduce expenses with a new batch of technologies that may be in use within the next three to five years, said Dan Wicklum, chief executive officer of Canada’s Oil Sands Innovation Alliance.

Radio Frequencies

Steam operations could be improved with machines that put water in direct contact with a flame, rather than by heating it in a vessel. Companies are also looking at replacing steam with microwaves or radio frequencies. The advances could help oil-sands operators cut costs by as much as 40 percent and reduce greenhouse-gas emissions by as much as 80 percent, Wicklum said.


View Full Article


Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.