By: Jim Bentein and Deborah Jaremko
The Calgary-based Canadian Energy Research Institute (CERI) acknowledges troubling economic headwinds as the industry moves into 2009, but is not in a panic mode. CERI released its annual Oil Sands Industry Update in early November.
"The financial crisis is serious," CERI senior economist Dave McColl said. "If the U.S. economy enters a big slowdown that could put the brakes on some development, but the resource will still be developed. It´s just a matter of time."
CERI´s forecast remains an optimistic one, even in the face of increasing uncertainty.
For one, costs of steel, natural gas, and other inputs have started to come down. In addition, the declining Canadian dollar makes projects more competitive.
CERI believes integrated oilsands mining projects are economic at a price of C$100 per barrel, while non-integrated in situ projects are economic at C$80 per barrel.
It assumes many costs will decline or stabilize, with the exception of labor costs.
"They tend to be the stickiest costs," said McColl.
Even in that area there´s a benefit from the economic crisis, with many experienced workers who had planned to retire not being able to do so (because the value of their investments has declined).
Their experience will allow developers and operators to contain costs as well, while they remain in the workforce longer and can provide mentoring to new workers.
McColl also thinks it´s likely that larger, better-financed oil and gas companies will take advantage of the current turmoil to acquire leases. Some may already be involved in the oilsands while other new players, such as the Chinese, may look upon it as an opportunity.
Smaller companies with less access to capital will face serious problems financing projects.
CERI still remains bullish, believing production could almost double to three million barrels per day by 2013, with output growing to five million barrels daily by 2030.
It envisions investment in the oilsands reaching C$472 billion between now and 2030, becoming larger than any other sector in the country´s economy at the same time.
The slowdown in the oilsands sector will mean thousands of construction jobs that would have been created in the near term will not be, several observers now say.
"There´s still billions of dollars of expenditure, but the frenzied pace of development is slowing down," said Richard Cooper, leader of Deloitte´s Canadian energy and resources department, who adds that the impact will be felt next year and in 2010.
Deloitte recently completed a study called Producer´s Dilemma II: Managing Development in a World of Scarcity. Originally completed in May using game theory, the report says collaborative investment in practices designed to promote sustainable development, such as carbon capture and storage, are required to promote upgrading and refining in Alberta, as well as to drop greenhouse gas emissions. In May, the price of oil was about US$125 per barrel, and the now-global financial crisis had yet to set its talons around the entire world. Deloitte ran the numerical model again in October, and "the outcomes didn´t change," Cooper says-in fact, he says the aspect of needed collaboration was enhanced.
"This is a perfect time for that enhanced collaboration," adds Brant Sangster, a Deloitte senior independent advisor and former oilsands vice-president with Petro-Canada. "You´ve got a bit of a delay happening now."
Like CERI, the folks at Deloitte are not overly concerned with currently low oil prices, noting that over time, the price of oil is set by the supply/demand relationship. Sangster says that although demand is not increasing as steadily as in the past, it is still increasing. And at the same time, groups such as the International Energy Agency are predicting annual global decreases in production of 6 to 9 per cent.
"You´re going to have that adjustment of the crude oil price," Sangster says, adding that in the meantime, input costs for oilsands projects will likely come down. "Companies can go back and renegotiate with their contractors. There´s an opportunity for the break-even cost to come down."
Cooper reminds that the oilsands industry is not a short-term venture.
"The long-term economics of the oilsands have not changed."
Sangster adds that these are 40-50 year projects. "[Companies] were never using $147 oil [in their plans] to start with."
The oil price plunge is not a new experience for Robert Peterson, an oil patch veteran who held senior positions with ExxonMobil for several years (he is not the same Robert Peterson who was once chief executive officer of Imperial Oil). Peterson is now a vice-president in the chemicals and petroleum practice of consulting firm CRA International.
"In the late 1990s prices got down to $10 a barrel," he notes.
Even five years ago, prices were at $30 per barrel, and the average was $22.06 per barrel from 1986 to 2006. As recently as 2005, prices were at just above US$50 per barrel.
Many have forgotten that this is a boom-bust industry, he said.
Bob Dunbar hadn´t.
Dunbar, a Calgary-based consultant who is president of Strategy West, has been an observer of the oilsands sector since its early days back in the 1970s. From 1970 to 1980 he was with the then energy industry regulator the Energy Resources and Conservation Board (ERCB), serving first as assistant manger and later as manager of its oilsands division. He later worked with Petro-Canada in strategic planning.
With 40 years of experience in the industry in Canada, Dunbar has seen many ups and downs, experience he now brings to his role as a consultant specializing in the oilsands sector.
Even so, he admits that the recent rapid decline in oil prices caught him by surprise.
"I didn´t expect it and I don´t think a lot of people did," he said.
Dunbar was also shocked by the decline in the shares of most of the publicly listed oil and gas companies, with many down by 50 per cent or more, but says that most established oilsands producers can withstand a relatively long period of lower prices.
"With the legacy producers, they have positive cash flow at somewhere around $30 a barrel."
This would apply to long-term miners Syncrude and Suncor, as well as to in situ operators like Imperial Oil, which has been operating in the Cold Lake region through numerous ups and downs since the 1960s.
Dubar says that even some of the more recent players, such as Shell Canada, 60 per cent owner of the Athabasca Oil Sands Project (AOSP) earn a small profit with prices in the US$40 range.
Offsetting lower oil prices are lower prices for natural gas, a major cost factor in most oilsands and in situ projects, and other inputs, possibly including labour, he said.
"Anyone who is operating has all of their capital expenses behind them. At $50 and $60 a barrel they still have cash flow and earnings."
The economics of some of the newer projects, such as Canadian Natural Resources´ $9.2-billion, 110,000-barrel-per-day Horizon mine, and the $6.1-billion, 60,000-barrel-per-day Opti-Nexen Long Lake in situ project, are more questionable at lower prices because of high capital costs.
The industry has already started to react to the lower price environment. For instance, Suncor announced in late October it would reduce the spending, pace of construction, and manpower on its Voyageur upgrader, delaying the scheduled completion of the project from 2011 to 2012.
Rick George, Suncor´s president and chief executive officer, recently said Voyageur is "very easily financeable" at oil prices of $80 per barrel.
Fort Hills may not be so lucky. The project, operated by Petro-Canada with 20 per cent interest each from UTS Energy and Teck Cominco, is in troubled waters. Petro-Canada is deferring the upgrader portion completely, and will not make a sanction decision for the mining portion until well into next year. Fort Hills (including the upgrader) was most recently pegged at $23.8 billion by the partners.
Recalling similar times in history
Dunbar recalls many similar periods when the sector was challenged because of low oil prices.
He sat on the ERCB panel that reviewed plans by Imperial Oil for its Cold Lake in situ project, a multi-billion-dollar, 100,000-barrel-per-day installation the company announced in the early 1980s. That plant, which was to include an upgrader, was scrapped after the ill-fated National Energy Program was imposed by Ottawa, followed by a dramatic fall in oil prices.
About the same time, Shell was proposing its Alsands mining project, which would have been about the same size. It too was scrapped.
Imperial subsequently developed a plan to build Cold Lake in phases, a plan that then-Alberta Premier Peter Lougheed touted by saying it was a "small is beautiful" strategy.
Dunbar says it is possible the industry will react in a similar manner if low prices prevail, moving to the development of more steam assisted gravity drainage (SAGD) projects, which can be built in smaller increments than mining projects, thereby reducing risks.
In any case, it´s hardly an industry facing a depression. Oilsands production is now about 1.32 million barrels per day, with about 785,000 of that coming from integrated mining projects and the rest from projects like Imperial´s, which sends bitumen to its own upgraders and refineries, and to U.S. markets.
In fact, even with depressed oil prices, bitumen from non-integrated projects has ready markets in the U.S., where refineries can increasingly handle heavier crudes.
"Demand for bitumen and heavy oil is still strong," said Dunbar.
If anything, the lower crude prices may actually be welcomed by some in hyper-growth areas such as Fort McMurray.
"This current situation doesn´t keep me up at night," he said. "There´s a lot of uncertainty but the industry has always dealt with uncertainty."
Dunbar still expects overall oilsands production to reach 3.7 million barrels per day by 2020.
Economics and greenhouse gases
Right now, it seems project after project is being stalled. As more and more operators threaten to delay or cancel projects outright, Peterson says the federal government will realize it can´t afford to lose one of the few remaining engines of the Canadian economy, and may adjust its environmental strategy.
Peterson says Ottawa will almost certainly have to drop plans to impose aggressive greenhouse gas reduction targets on the Canadian oilsands industry, having to bend over backwards to help producers cope with a world of lower oil prices.
"In an economic slowdown the economy trumps the environment," Peterson says. "If this trend [towards lower oil prices and a serious recession] continues, the regulators will reconsider [their] targets."
Last spring, as oil prices were moving to US$100 per barrel (they reached almost $150 in mid-July), Peterson warned oilsands operators and those planning projects during a visit to Calgary that climate change-related regulations being proposed by the federal government would require oil prices of more than $100 per barrel, adding that even at that level new plants would be uneconomic.
Peterson told operators he met with that the regulations would get progressively more stringent.
"Our interpretation is [that the regulations] move from tough, to tougher, to toughest," he told Nickle´s Energy Group at the time. He said initial targets, which would reduce greenhouse gas emissions by 10 to 18 per cent by 2011, could likely be met. But, the coming requirement that all new oilsands plants include costly carbon capture and sequestration (CCS) technology meant it would be "unlikely any new oilsands plants would be built."
Now, with many analysts warning oil prices could hover between US$50 and US$70 per barrel for some time, Peterson is saying Ottawa will have to adjust to the new reality.
"If this price downturn continues for one to three years, there will be a reconsideration of the tough standards Ottawa was looking at."
He suggested the re-election of a Conservative government, with a more business-friendly approach than the opposition parties, may also be a factor.
Peterson said all operators can live with the beginning target of a 10 per cent reduction in greenhouse gas emissions, so the government will be able to save face and say its moves have helped the environment.
"A 10 per cent improvement will translate into lower operating costs anyway [because of energy input savings] and as we move into a lower crude environment, operational efficiencies are important."
Source: The Oilsands Review
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