Canada’s shifting sands

Oil sands sector leans toward ‘bite-sized’ projects, away from mega operations, with some applications pulled, growth scaled back

GARY PARK

For Petroleum News

Imperial Oil has launched production ahead of schedule from an C$8.9 billion expansion of its largest oil sands operation entering a robustly priced market for heavy oil.

The second phase of the company’s Kearl oil sands mine will double capacity to 220,000 barrels per day (with plans in the works to add another 125,000 bpd), making the major contribution to an expected increase this year of 300,000 bpd to Alberta’s current oil sands output of 2 million bpd.

Also in the startup stage are ConocoPhillips’ 118,000 bpd second phase at its Surmont in-situ facility; Husky Energy’s initial 60,000 bpd at its 200,000 bpd Sunrise project; and Imperial’s addition of 40,000 bpd to its 140,000 bpd Nabiye Cold Lake in-situ operation.

All of those elements carry a ring of business-as-usual, but that’s far from accurate amid the economic, political and environmental turmoil afflicting the sector, as oil prices remain on a wobbly high-wire and companies make desperate efforts to shore up their balance sheets in anticipation of more downside risk around the corner.

Even so, Imperial can draw some comfort from its Kearl experience, with Chief Executive Officer Rich Kruger noting that the project benefited significantly from his company’s “design one/build multiple” approach combined with the expertise of its 70 percent parent ExxonMobil in project planning and execution and lessons learned from Kearl’s initial phase.

Low discount

Martin King, a commodities analyst at FirstEnergy Capital, said the new Kearl volumes coincide with a discount of less than 8 percent between Western Canada Select and West Texas Intermediate, compared with the usual spread in the teens.

“We, along with everyone else, really weren’t expecting to see these single-digit differentials that you’ve seen over the past month or so,” he said.

But King is forecasting that the differential will return to the low teens later this year if WTI remains around US$60 a barrel.

The mild uptick in prices has helped counter lingering oversupply concerns, regardless of OPEC’s continuing effort to use prices as the tool to build its market share.

Some production hikes, some delays

Once the Suncor-led Fort Hills mine - in partnership with Teck Resources and France’s Total - starts a 50-year, 180,000 bpd production life in 2017, the company will scale back its growth program to one drilling project a year of up to 40,000 bpd, said Chief Executive Officer Steve Williams, adding that there is no sign on the horizon of Suncor’s next mine.

Suncor has estimated Fort Hills can generate a 13 percent internal rate of return over its lifetime.

Others joining that school of thought include Royal Dutch Shell, which pulled a regulatory application to build a 200,000 bpd Pierre River mine and stalled by at least two years its 80,000 bpd Carmon Creek project in northwestern Alberta.

For the second time this year, Sunshine Oilsands has delayed the start of steam-injection at its 5,000 bpd West Ells project, which was scaled back two years ago from its targeted two-phase, 40,000 bpd development.

What startled many observers was the shaky explanation from Sunshine, which said it wanted to “assure facilities performance and achieve nameplate capacity.”

It said construction is “substantially completed” and various facilities are in the middle of being commissioned, yet the company - 14 percent owned by Chinese entrepreneur Kwok Ping Sun - opted to back away.

If Sunshine was looking for a reason to be edgy one was offered by insolvent Laricina Energy, which has shut down its 100 percent owned Germain commercial demonstration project and is negotiating with 40 percent partner Osum Oil Sands to close its Saleski pilot and shelve plans for a C$520 million, 10,700 bpd commercial project.

For now Laricina is operating under bankruptcy protection from a demand by a subsidiary of the federal government’s Canada Pension Plan Investment Board for payment in full of senior secured notes.

Husky: ‘bite-sized modules’

Consistent with that line of thinking, Husky has started steaming operations at its 10,000 bpd Rush Lake thermal recovery project in Saskatchewan and has three more in-situ operations due on stream over the next few years - its 10,000 bpd Edam East project, its 10,000 bpd Vawn project and 4,500 bpd at Edam West.

Among the startups, Pengrowth Energy is now ramping up output from its Lindberg project in the Cold Lake area of northeastern Alberta, doubling volumes this year to 10,500 bpd and aiming for 16,000 bpd by the end of 2015.

The contrast in construction and operating costs is obvious at the high end, with Cenovus Energy needing only 430 workers to produce 136,000 bpd from its Foster Creek in-situ project, while Syncrude Canada’s 400,000 bpd mine and upgrader has about 8,500 workers on site.

Concern over taxes

Tim McMillan, president of the Canadian Association of Petroleum Producers, said producers are prepared to take a greater leadership role on climate action as part of the growing global drive to reduce greenhouse gas emissions.

He said Alberta “developed the technology to get the oil out of the sand - and we are just as committed to getting our carbon out of the air.”

The said that since 1990, companies have reduced GHGs per barrel by 30 percent and are investing more than C$1 billion on innovative technologies that will produce oil from bitumen deposits with lower GHGs than other sources of oil.

“Climate change is a global challenge that needs to be tackled with broad-based policies that consider production and consumption by everyone.” McMillan said. “We will lead on technology and policy, but climate change is greater than the oil sands, greater than Alberta. Everyone has a role to play.”

Making case for Keystone

Development President Alex Pourbaix said announcements by the Canadian and Alberta governments to cut greenhouse gas emissions should be considered by the U.S. State Department as further evidence that the pipeline would not “significantly exacerbate” carbon output — the crunch point established by President Barack Obama to gain his approval through a Presidential Permit.

A letter to the department also noted that chief executive officers of some of the biggest oil sands producers, including Suncor Energy and Cenovus Energy, plus European based operators such as Royal Dutch Shell and Total, have urged tougher carbon pricing measures.

“Clearly recent Canadian, North American and international GHG policy developments are consistent with President Obama’s stance on not exacerbating the risk of climate change,” Pourbaix wrote.

In any event, he said the United States will need oil to meet its transportation needs for the “foreseeable future” and will remain a net importer of oil “for decades to come,” meaning Keystone XL and Canadian heavy crude will play a vital role.

Erin Flanagan, an oil sands analyst with the Calgary-based Pembina Institute, said the Canadian and Alberta policy announcements “have not translated into real change ... so TransCanada’s argument that these policy developments should green-light the project don’t hold water.”

—GARY PARK