Rising costs of labor, services and commodities, plus the need to break into new markets outside North America — they top the list of risks facing the oil sands sector, says a new report by Ernst & Young.
On the other hand, those looking for some upside can draw strength from the firm’s list of emerging opportunities, led by growing global demand for production, the economic importance of the oil sands to Canada and the increasingly important role of bitumen production in the global oil mix.
Continuing its good-news, bad-news theme, the report says oil sands companies face real challenges in their planning and forecasting because of an uncertain global economy, conflict in North Africa and the Middle East, supply-and-demand imbalances, crude price volatility and currency fluctuations, compounding the problems for companies to manage their costs.
The study says that optimism over crude pricing, with most analysts counting on levels remaining above $80 per barrel over the long term, have helped previously uneconomic oil sand assets suddenly become viable.
“The risk comes in when oil prices drop below the costs of extracting oil sands, which is more expensive to produce than conventional oil,” meaning that mostly companies with deep pockets and low cost of capital can be expected to handle lower crude prices and take advantage of potential short-term lower material and labor costs, the report says.
Decoupling value chain
Study author Lance Mortlock, senior manager in Ernst & Young’s oil and gas practice, says companies are no longer prepared to risk everything on single-stage capital intensive projects.
As a result, many are “concentrating on decoupling the value chain by moving away from fully integrated projects (production, upgrading and refining) and completing segments in smaller incremental phases,” he says.
Mortlock says some companies are looking to spread their costs and risks by taking full ownership of either production or upgrading and seeking collaboration on the other.
The report notes that operating costs rose to $25.50 per barrel in 2010 from $19.60 in 2006, putting development and operating costs for the oil sands at the high end of the global scale.
Ernst & Young says there are signs of a shift in industry emphasis and dynamics in a few areas, notably towards steam-assisted gravity drainage projects and away from mining operations, with the break-even point for SAGD at $42 per barrel compared with $90 for upgraded mine projects.
Advantages of SAGD
The report says mining projects are also more labor intensive and thus face higher costs in a tight labor environment, while SAGD projects are more environmentally friendly and have a better record of being completed on time and on budget.
It says that changing business model opens the way for smaller operators such as MEG Energy and Athabasca Oil Sands, which are focused on smaller-production, SAGD-type projects.
Mortlock wrote that as the oil sands play a larger role in the energy mix, it is more important than ever for the oil sands to manage environmental challenges by acting responsibly and refocusing on energy efficiency and improved reservoir recovery processes to “reshape public perception and gain the public confidence needed for growth.”
He says market diversification to include Asia is crucial as the United States looks for ways to reduce its dependence on foreign crude suppliers.
The report says U.S. dependence on imported oil fell below 50 percent in 2010 for the first time in more than a decade, partly because of a weak economy and the emergence of more fuel-efficient vehicles and the Energy Information Administration expects that trend to continue through the next decade.
As a result, Canada needs to focus on diversifying its oil and gas customers by building relationships globally, Ernst & Young says.
