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Energy board: Jury out on oil sands Beset from all sides, sector production scaled back by 200,000 barrels per day by 2015; despite costs and regulatory burdens Gary Park For Petroleum News
It is one of those wake-up calls that come in the middle of a disturbed sleep.
You’re not sure whether it is real or imagined.
But the message is clear enough, spelled out in temperate language by one of the most trusted voices in Canada’s petroleum industry.
In releasing its 2005-30 energy outlook, the National Energy Board quietly offered the thought on page 24 of a 123-page study that challenges confronting the oil sands sector have “slowed the pace of activity somewhat and a number of companies are reassessing the economics of the projects.”
The challenges have been detailed ad infinitum, led by the surging cost of construction materials and a shortage of professionals and skilled labor resulting in a 40-50 percent rise in capital costs over the past two years, with budgets for integrated mining and upgrading projects in the 2010-11 time-frame now estimated at C$80,000-$100,000 per flowing barrel.
In addition, the NEB notes that volatile oil and gas prices and volatile light-heavy crude price differentials compound the risks of predicting rates of return, while a stronger Canadian dollar against its U.S. counterpart has a “significant negative impact on project economics.”
The recent elimination of the Canadian government’s Accelerated Capital Cost Allowance has “also had an effect,” the study says.
Additional uncertainties due to greenhouse gas regulations The oil sands sector now faces additional uncertainties relating to federal and provincial regulations covering greenhouse gas emissions, while provincial regulations concerning water use, air quality and land use are “not yet fully defined.”
And, to cap it all off, the Alberta government is pledged to hike oil sands royalties in 2009.
But the NEB finds reason to argue that the outlook is not all one-sided.
It says the “challenges faced by the oil sands industry are counter-balanced by the opportunities.”
In an age of “increasing resources nationalism around the world, Canada’s huge oil sands reserves, set in a climate of relatively stable political and economic policy, represent an attractive target for investment.”
“The potential for technological innovation to reduce the costs of bitumen extraction and upgrading is an additional attraction.
“Given the outlook for continued higher oil prices, return on investment should be sufficient to drive oil sands expansion,” the study says.
Chill from cautionary signals Even so, there is a slightly chilling aspect to the board’s cautionary signals at a time when oil prices have nudged US$100 per barrel.
Applying its baseline projection, known as the Reference Case, which is the board’s “view of the most likely outcome up to the year 2015” — with oil prices averaging a modest US$50 per barrel — the regulator suggests oil sands operators should be able to generate “sufficient cash flow … to actively expand production levels.”
Even so, it has put one foot on the brake pedal, forecasting that even if C$80 billion is spent on projects over the period 2005-15, the end result is likely to be total output from the oil sands of 2.8 million barrels per day, down 200,000 bpd from what was predicted only a year ago.
Bill Wall, an NEB market analyst, said the reduction stemmed from the “rapid escalating costs of putting in capacity.”
If that estimate is accurate, Canada’s total oil production by 2015 will be 4.05 million bpd of crude, 61 percent more than in 2005.
If oil prices remain high, the output could grow to 6 million bpd by 2030, 5 million bpd coming from the oil sands, but a return to US$35 per barrel would slash total production in half, with the oil sands contributing 2.7 million bpd — a prospect that Wall rated as unlikely.
Greg Stringham, vice president of the Canadian Association of Petroleum Producers, told the Calgary Herald that although the NEB and CAPP are on a similar wavelength with their forecasts, oil sands predictions might need further revisions as projects scheduled to start construction in the next couple of years are weighed against a higher Canadian dollar, increased royalties, GHG regulations and tax changes.
He said many companies, given the turmoil they are experiencing, have already postponed decision-making.
Stringham said it is almost guaranteed that the oil sands can rise to 2 million bpd from the current 1.2 million bpd, but taking the next step to 3 million bpd between 2012 and 2015 involves projects that are under close scrutiny.
Resources remain unchanged For all of its scenarios, the NEB says crude oil and bitumen resources remain unchanged — 173 billion barrels in Alberta’s oil sands deposits, 3 billion barrels of conventional reserves in the Western Canada Sedimentary basin and 1.3 billion barrels in Eastern Canada and frontier areas.
Because the WCSB is a mature supply basin, exploration efforts yield increasingly smaller pools, but development drilling and improved oil recovery methods, primarily waterflooding, make up a larger portion of reserves additions.
Following successes in Saskatchewan, the NEB believes carbon dioxide flooding will play a larger role in mature oil reservoirs in the WCSB.
But the bottom line for conventional crude oil and equivalent in the WCSB indicates that by 2015 conventional light crude production will be 328,000 bpd and conventional heavy crude will be 399,000 bpd, an overall drop of 30 percent from 2005 levels.
For the East Coast offshore, assuming a new field of 500 million barrels is found and brought on stream by 2015, production levels are estimated at 473,000 bpd, compared with this year’s expected 416,000 bpd.
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