Oil sands: bruised, but not out
The oil-price collapse took some steam out of the boom in Canada's energy sector. Development is likely to proceed at a more sedate pace
"I ONLY wish I'd bought land up there," says Ned Gilbert. It might seem a strange wish, because Fort McMurray's property market is in a trough. The dip in the price of houses and land in that region has been more pronounced there than anywhere else in Canada because nowhere else were workers willing to pay Manhattan prices for a view of boreal forest with winter wind-chill factors of –50°C. And nowhere else in the world has the collapse in the oil price hurt quite so badly.
But Gilbert does not do short term. As a frontiersman when North America's oil companies were more accustomed to arguing with aboriginals for land rights than with environmentalists over pollution, it was he who persuaded the industrialist J Howard Pew to stick with a crazy plan to extract bitumen from northern Albertan soil and convert it into oil. His boss agreed, although the land the company leased near Fort Mac was named Gilbert's Folly. Pew's company, Sun, later morphed into Sunoco and later still Suncor.
Gilbert's Folly is now called Firebag and it is one of the oil sands' biggest in situ projects. And last month, Suncor completed a take-over of the former state-owned energy firm Petro-Canada, consolidating its position as the oil sands' big bruiser.
Gilbert can take some credit for that, because the take over was conclusive evidence, if any were still needed, that the oil sands have come of age. It was not many years ago, say old hands in the sector, that conventional oil types in Calgary's Petroleum Club looked down their noses at oil-sands executives. Now the bitumen boys are in charge.
That points to two realities in Alberta's oil patch. First, the oil sands are not just the most promising source of reserves growth for the world's oil companies; for now, they are also the only place in the world that developers can operate with no worries about the geology and no real concerns that the government will start tearing up contracts. The majors, says Andrew Nikiforuk, author of Dirty oil: the tar sands and the future of a continent, are banking on the oil sands.
The second reason is that despite the ski-jump curve in oil prices in the last year, oil-sands development is not stopping. Activity has slowed, but speak to anyone in boomtown Fort Mac and they will tell you this is a pause for breath. Don Thompson, of the Oil Sands Developers Group (OSDG), an industry body, says projects are being delayed, not abandoned. And that has eased some of the congestion.
Contracting for services, hiring workers, buying the raw materials used in the brutal business of digging up the muskeg to search for oil: everything's suddenly easier, say the men on the ground. "I used to have people tell me what their price was," says one Shell manager. "Now I have three companies competing for the contract."
That is not to say things have not been rough for the past year. Cost cutting by producers has led to thousands of job losses. Thompson says the numbers of camp-dwelling workers is around 23,000, a drop of 4,000 in 12 months. Fort Mac's roads seem sedate compared with the traffic frenzy Petroleum Economist experienced the last time it visited. "People are still drinking in bars like they were," says one Newfoundland exile who moved to the patch during the boom. "But the restaurants are a lot quieter."
Meanwhile, although the costs of raw materials and labour have been falling steadily, they have not dropped as far as many companies would like. Steel, which is trading around levels last seen in 2004, and natural gas priced at $3-4/m Btu, are an exception. The more-than-halving of the gas price is crucial to in situ projects, which use steam to lift bitumen too deep to be mined. That kind of production accounts for almost half of the oil sands' output.
Oil-sands critics say the companies are making a meal out of the cost issue to put more pressure on government to ease Alberta's new royalties scheme. After a controversial review of what many considered an overly generous royalty rate during the boom years, the government raised its take from the oil sands to a maximum 9%. The new regime came into effect at the beginning of this year – and the industry wants it reviewed again. BC and Saskatchewan, meanwhile, have tried to undercut Alberta with more generous terms (see box p12).
Yet the crunch between falling oil prices and stubbornly high costs has hit several projects. It has also taken some of the momentum out of the forecasts for production. Back in 2006, the Canadian Association of Petroleum Producers (Capp) was predicting that output would breach 4m barrels a day (b/d) by 2020. Now Capp says it will reach 3.3m b/d by 2025.
That scaling-back is expected to reduce investment in the oil sands by about C$300bn ($276bn) to 2020. In the near term, says OSDG, developers are likely to spend about C$81bn to 2010, C$47bn less than previously expected. Capp says capital spending in the oil sands this year will be just C$10bn – half the figure for 2008.
The cuts reflect the number of projects that have been set aside (see box). Of six projects under construction only Suncor's plans for its Voyageur mine and for a third phase at the Firebag project have been shelved. But almost half of the projects that have approval, but have not begun construction, are now delayed.
If Alberta did not depend so heavily on income from its energy sector, an easing of the congestion in the oil sands might be welcome in the province. But the evaporation of so much capital has been exacerbated by the drop in oil and gas prices. Gorged on oil receipts just four years ago, the province handed out C$400 cheques to all its citizens (except prisoners). The payments put a C$1.6bn dent into 2005's C$6.8bn budget surplus. Yet Alberta's deficit this year could now be almost as high. (In April, the province forecast a deficit of C$4.7bn.)
In the longer term, however, the oil sands will still be a cash cow for Canada. Between now and 2020, calculates the Canadian Energy Research Institute, the oil sands are likely to generate about C$123bn in royalty and tax revenue for the country. The federal government will take 41% of that; Alberta's share will be 36%; and the other provinces will split the rest. The developments will also add C$0.79 trillion to Canada's GDP between now and 2020; as a share of GDP, the oil sands will account for 3% by 2020, compared with 1.5% in 2000.
"There's been a convergence of the Alberta economy with the oil sands," says Marlo Raynolds, the head of the Pembina Institute, an environmental group (see p40). Given the monies at stake it is understandable that the federal and Alberta governments want to bring the oil sands back up to speed.
But that is not the way all Canadians feel, if a recent poll conducted for Environmental Defence, a green lobby group, is to be believed. Ahead of a meeting of Canada's premiers last month in Saskatchewan, where plans for a cap-and-trade system were discussed, the poll suggested that 52% of respondents wanted the pace of development in the oil sands to be slower.
Such polling will not convince industry. But environmentalists are not the only ones who think Alberta's oil-sands rush was unseemly – and should not be allowed to happen again. Peter Lougheed, a former premier of Alberta, told Petroleum Economist in an interview last month that the provincial authorities must take a stronger role in the oil sands. Projects must be developed "uniformly" and in stages to ensure that Albertans, the owners of the resource, benefit most from their development. The frenzied activity of recent years, he suggested, has brought a high-cost economy in its wake.
At the same time, Alberta did not transfer the oil wealth during the good years into its savings fund. Lougheed set up just such an investment fund in the 1970s. Norway copied the example. But while Norway's is worth around $300bn, and could double in coming years, Alberta's fell by about C$3bn last year to C$14bn.
Developing the projects at a more sedate pace is not the only thing Lougheed calls for. Alberta should also carry through with plans to export bitumen to Asia. One pipeline is under way (see box p10), but it would serve Alberta's – and Canada's – interests best to break the US' monopoly of the country's oil exports. With the price differential of bitumen to US benchmark crude WTI narrowing in recent months, now is a difficult time to persuade companies to upgrade crude in Alberta (see p12); but expanding its portfolio of international customers for the raw product would make strategic sense.
Supporters of Alberta's Conservative government argue that the market has done the job, forcing a correction on the oil sands that has delivered the more sedate pace Lougheed and others have demanded. Yet having clawed back some more control over its royalties regime, the province would do well to consider the slowdown as less a "pause for breath" and more as an opportunity to re-structure the oil-sands schedule for the longer term.
Suncor's take-over of Petro-Canada, say analysts, points to further consolidation in the sector. Nexen and Imperial Oil, two oil-sands players, could be next on the block, predict Calgary executives. And many expect that mergers and acquisitions activity will help enthuse the companies about the oil sands again. Suncor seems destined to use cash flow from Petro-Canada's conventional oil production – and possibly the divestment of some of the company's international assets – to fund its bitumen business.
Ticking along
Keeping oil-sands projects ticking along once they are on stream now requires a price of around $35 a barrel. Thompson says about $80/b is necessary for new investments, although in light of a softening of some costs, others put the figure much lower. In any case, a recovery in global oil demand will bring the margin within reach for many companies, especially if they have eked out cost savings through consolidation in the meantime.
And global recovery is what most analysts expect from the oil market. Demand for oil-sands crude in the US Midwest, according to OSDG, will almost double to 2m b/d by 2015.
And that is just in the short term. Further ahead, no authority is predicting weaker global demand for oil in the coming decades. For political reasons, much of the world's conventional oil is now beyond the reach of Western multinationals. Depletion is taking care of the easy oil that is within their grasp. Neither problem affects the oil sands. That is why the majors are in Alberta. And it is why Alberta must plot the exploitation of its resource carefully. The oil sands are here to stay.
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