Oil sands: Slowdown, or showdown?

Majors Suncor, Cenovus put projects under microscope; look to improve profitability in challenging climate, no plans cancelled yet

By Gary Park

For Petroleum News

Big-league players in the Alberta oil sands are finally swallowing some unpleasant medicine.

For the past year, industry observers have been calling for a show of pragmatism amid labor shortages, plugged-up pipelines, doubts that efforts to open up export markets in Asia will succeed and the double discounting of prices for Canadian heavy crude in a saturated North American market.

The touch of hubris that marked sector giant Suncor Energy, which had boldly predicted it would double production to 1 million barrels per day by 2020, has given way to humility.

Steve Williams, who replaced Rick George as chief executive officer in May, has taken decisive action by applying the brakes to about C$21 billion of projects — two bitumen mines and an upgrader to convert the bitumen into refinery-ready crude — being developed under a joint-venture with France’s Total.

“We are heavily involved in profit-improvement reviews at the moment and the indications are that some of these projects are moving backwards, not forwards,” he told analysts.

“In principle, there is an opportunity to not progress the projects… it’s possible to withdraw,” he said, suggesting there could be a delay in the planned mid-2013 corporate sanctioning decisions.

Williams was emphatic that Suncor will not be “schedule-driven,” emphasizing that the company’s overriding objective is to maximize returns for shareholders.

The prospect of dialing down expansion of Suncor’s massive operations is seen as an acknowledgement that the planned rate of growth is not sustainable.

On the same day Suncor was delivering its reality message, Cenovus Energy added to the gathering clouds over the oil sands.

After several months of optimistic updates, it abruptly called off its search for a partner to develop its 90,000 bpd Telephone Lake project and move forward on its own.

“This was never a financially driven process,” said Chief Executive Officer Brian Ferguson. “This was about looking for something that adds strategic value.”

For Cenovus, the failure to land a partner — generally expected to be an Asian company — puts in doubt its target of raising net oil sands production five-fold to 300,000 bpd by 2020, although Ferguson is not giving up on that goal.

“Our growth rate is an outcome of our ability to execute and the economics are still very robust for us,” he said. “We develop our assets in a phased, manufacturing approach that allows us to control schedule and control cost.”

The three joint-venture projects, with Suncor and Total as the dominant partners, are: the Fort Hills mine to start producing 160,000 bpd in 2017; the 100,000 bpd Joslyn mine to come on stream in 2017; and the 200,000 bpd Voyageur upgrader, with a price tag of C$11.6 billion.

Williams said the future of the three projects poses the “first challenging debates” within the joint-venture which was announced at the end of 2010 and, he said, is in a healthy state.

“Each of the contracts have different mechanisms for dilution,” he said.

The current focus is on achieving the “best economics” by replicating designs to lower engineering and construction costs.

On the upside for Suncor, it reported cash operating costs for the second quarter of C$38.35 per barrel, down from C$41.05 a year earlier, and said it is on track to achieve C$35 or less.