Analysis: Oil sands defy investment outlook

OREANDA-NEWS. June 29, 2015. New oil sands start-ups will maintain Canada's strong output growth to 2020, but long-term prospects face a sharp downgrade as operators defer new investments.

ExxonMobil has started output at its Kearl expansion several months ahead of schedule, doubling capacity to 220,000 b/d. The firm has also started its Cold Lake Nabiye expansion, which will lift output to 40,000 b/d by the end of 2015 from 12,000 b/d in late February.

US independent ConocoPhillips' Surmont phase 2 project is on track to start up in the third quarter, which will raise gross capacity to 150,000 b/d by the end of 2017 from 27,000 b/d now. Canada's Husky Energy started the first 30,000 b/d plant at its Sunrise project in March, with the second 30,000 b/d plant expected to follow in September. Sunrise will produce 200,000 b/d when the third phase, which is awaiting a final investment decision, is completed.

Canadian firms Cenovus' Christina Lake phase F, Canadian Natural Resources' Horizon phase 3 and Suncor's Fort Hills venture are still on track for start-up after 2015.

Oil sands output will rise by 6pc to 2.29mn b/d this year, and to 3.07mn b/d by 2020, Canadian oil industry association Capp says. But Capp has cut its 2030 forecast for total Canadian output by 17pc since last year's projection to 5.3mn b/d, reflecting an expected slowdown in oil sands investment decisions because of lower oil prices. Total Canadian production was 3.7mn b/d last year.

Evidence of an impending sharp slowdown in oil sands investment is growing. Suncor, the largest oil sands producer, has accelerated cost-cutting measures to achieve up to C\\$800mn (\\$654mn) in savings by the end of 2015, advancing an earlier target for 2016. The company has cut 1,000 jobs and plans to lower its 2015 capital expenditure (capex) budget by \\$1bn, and put its 20,000 b/d MacKay River 2 expansion on hold for at least a year.

"Any project beyond 2018 is vulnerable to delay and most have already announced scheduling revisions," consultancy Wood Mackenzie says. It expects multi-year delays in subsequent phases of projects including Cenovus' Christina Lake phase H and Narrows Lake phases A, B and C.

Capacity cuts

Energy regulator the National Energy Board in March estimated that over 500,000 b/d of planned oil sands capacity had been cut since June 2014. This included Cenovus' Foster Creek H and Christina Lake G expansions totalling 100,000 b/d, Shell's 80,000 b/d Carmon Creek 3 and 4 expansions, Norwegian state-controlled Statoil's 80,000 b/d Corner project, and Canadian Natural Resources' 40,000 b/d Kirby North. Shell in February shelved its proposed 200,000 b/d Pierre River oil sands project.

But oil sands operators hope that technological improvements and falling services costs will help them meet their output growth targets even as they cut capex. "Applying the lessons of rapid [shale] well drilling to Canadian heavy oil sands, improvements in reservoir steam injector flows improve recovery 30pc there too," US consultancy Wolfe Research says, after meeting ConocoPhillips' technology and projects executive vice-president Al Hirshberg. Breakeven costs for oil sands projects have fallen to \\$60/bl from \\$85/bl, with a 10pc rate of return, Wolfe Research says.