Two announcements have recently rocked the Canadian oil sands industry. On 29 March 2017, ConocoPhillips Canada Resources Corp. announced it had entered into a C$17.7bn transaction to sell almost all of its Canadian assets to Cenovus Energy Inc. The bulk of the value for the deal is attributable to its 50 percent partnership interest in FCCL Partnership, a joint venture with Cenovus Energy Inc. for the development of the Christina Lake and Foster Creek oil sands projects. Less than three weeks earlier, on 8 March 2017, Shell announced that it was selling down most of its oil sands position in Canada to Canadian Natural Resources Limited as part of a C$12.74bn transaction that also saw Marathon Oil Corporation sell its oil sands position in Canada, including its 20 percent interest in the Athabasca Oil Sands Project, to Canadian Natural Resources Limited and Shell Canada Energy for C$2.5bn.
In these difficult conditions, it should come as no surprise that the Canadian oil sands appear to have fallen out of favour with the international majors. The last few years of depressed oil prices have been hard on Alberta's energy sector. Companies in the oil sands industry in particular have experienced sustained cost cutting and restructuring in an effort to remain competitive. Over 64 projects in the oil sands have been delayed or cancelled since 2014. In June 2016, extensive wildfires temporarily shut down operations, costing the oil sands industry billions of dollars, and the government began shaping climate change policy plans by introducing an annual 100 megatonne limit on greenhouse gas emissions from oil sands operations, as well as a carbon tax of $20 per tonne of CO2 in 2017, rising to $30 per tonne in 2018.
Even before the March 2017 announcements, it was clear that the oil sands had lost its lustre among the international majors. Since mid to late 2015, Total S.A., Murphy Oil Corporation, Statoil ASA, ExxonMobil Corporation, ConocoPhillips and Royal Dutch Shell Plc have all significantly or entirely reduced their exposure to the Canadian oil sands industry. In September 2015, Total S.A. sold a 10 percent interest in the Fort Hills Oils Sands Project to its partner, Suncor Energy Inc. for C$310m, reducing its working interest to approximately 29 percent. In late 2015, Royal Dutch Shell Plc announced its decision to abandon its partially constructed Carmon Greek oil sands project, notwithstanding earlier repeated public assurances to the contrary. In June 2016, Murphy Oil Canada Ltd., a subsidiary of Murphy Oil Corporation, sold its 5 percent interest in the Syncrude joint venture to Suncor Energy Inc. for C$937m. In December 2016, Statoil ASA announced that its Canadian subsidiary, Statoil Canada Ltd. would sell its oil sands position in Canada to Athabasca Oil Corporation for C$435m in cash and certain contingent future value payments, as well as 100 million shares of Athabasca Oil Corporation. Given the price, the deal required Statoil to book an impairment charge on its assets of between C$500m and C$550m. In January 2017, Imperial Oil Canada, a subsidiary of ExxonMobil Corporation, announced that it had debooked 2.6 billion barrels of reserves. Less than one month later, in February of 2017, ConocoPhillips announced that it debooked 1.75 billion barrels of oil equivalent of reserves.
Simply put, for those companies that have the ability to allocate their resources on a global basis, low crude oil prices have made new investment in oil sands projects unattractive, with constrained resources being targeted to shorter term, lower cost plays. The international majors, among others that are exiting or reducing their exposure to the oil sands industry, have sold their interests at steep discounts to the value they once held. The oil sands projects being sold are selling at prices that are less than the cost that was incurred to develop them. That is good news for Canadian oil sands producers. Suncor Energy Inc., Athabasca Oil Corporation, Canadian Natural Resources Limited and Cenovus Energy Inc. have all taken advantage of this. In fact, Suncor Energy Inc's acquisition of the Murphy Oil Corporation's interest in the Syncrude project came on the heels of Suncor's Energy Inc's acquisition of Canadian Oil Sands Ltd. With these two acquisitions, Suncor Energy Inc. took a majority position in the Syncrude project and expects to eventually realise significant cost synergies with its existing projects. After several tough years that saw new oil sands projects cancelled or deferred, these acquisitions offer companies an economic alternative path to growth.
But growth through acquisition is not enough. In this lower price environment, oil sands producers also have to focus on technological and process improvements to increase production and reduce operating costs. Cenovus Energy Inc., in particular, has been busy exploring cost saving measures that, the company has indicated, has put its costs on par with many conventional oil producers. Technology innovation has played a large part; improved well pads, extended well lengths, and the aid of solvents in steam injection are just a few key changes that are driving down operating costs. Cenovus Energy Inc. anticipates that its new well pad design, for example, will result in cost savings per well of between 35 percent and 50 percent without compromising safety, compliance or production. A number of other initiatives that have been taken are outlined in the Government of Alberta Oil Sands Industry Quarterly Update for Winter 2016. Of particular note is that Suncor Energy Inc. has also changed its well pad design and anticipates that the new design will reduce its well pad facilities cost by as much as 50 percent. This is expected to drop Suncor's costs to $2m per well pair from a range of $4m to $9m per well pair. ConocoPhillips installed flow control devices in wells at its Surmont 2 SAGD project. The flow control devices have doubled ConocoPhillips cumulative oil production in those wells, so it is retrofitting the devices into other wells.
Today, there are hints of cautious optimism among industry players. Canadian oil sands producers, like Canadian Natural Resources Limited, Cenovus Energy Inc. and MEG Energy Inc., are announcing the resumption of deferred projects or making applications for new projects, such as the resumption of Cenovus Energy Inc's deferred expansion of its Christina Lake Project and Canadian Natural Resources Limited's decisions to restart the expansion of its Kirby South project. Cenovus Energy Inc. has also suggested that it may consider resuming its deferred Foster Creek Project and its Narrows Lake development. In February 2017, MEG Energy Inc. submitted an application for approval of its second steam assisted gravity drainage project, a project that MEG Energy Inc. proposes to build in three phases with a total design production capacity of 164,000 barrels per day.
But even with cautious optimism, our expectations of what lies ahead must be realistic. It is unlikely that we will see the development of mega oil sands projects like we did in the past – at least in the near term. Instead, the projects will be smaller and will be focused on achieving cost parity with conventional crude oil projects, reducing greenhouse gas emissions and ensuring environmental sustainability. The Canadian oil sands industry has another innovation challenge to meet in order to thrive in a lower price environment. It is well on its way and Canadian oil sands producers are leading the charge.
Previously published in Financier Worldwide, May 2017.
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