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Oil sands get their boom back

Suncor-Total deal heralds renewed emphasis on scale; cost worries beginning to surface again

THOSE inclined to think the Canadian oil-sands sector has set aside its grand visions while bracing for whatever governments do this year to curb greenhouse-gas emissions might want to think again. If anything, the industry is emerging from an 18-month recession-induced lull bigger and bolder than ever.

Apparently persuaded that economies of scale require even larger operations than those that have carried the oil sands through the first 43 years of their commercial existence, corporate decision-makers have rolled out a succession of megaprojects that point to a reshaping of their business.

Topping the list is a partnership forged by France’s Total, which has its sights set on 200,000 barrels a day (b/d) of bitumen production by 2020, and Canada’s Suncor Energy, which showed its hand two years ago by taking over Petro-Canada and has now unveiled a 10-year growth plan to reach 1m b/d by 2020.

Their alliance expects sanctioning decisions by the end of 2012 to spend more than C$21bn ($21bn) over the next six years, accelerating development of two oil-sands mines that will initially produce a combined 260,000 b/d and reviving work on an upgrader to convert 200,000 b/d of bitumen into synthetic crude.

To secure its place in the partnership, Total has paid Suncor C$1.75bn, but shelved its own plans for a 295,000 b/d upgrader near Edmonton, Alberta.

“This is a change for us, in the sense that Suncor has been a 100%-in-the-oil-sands, go-it-alone kind of company,” says Suncor chief executive Rick George. “This is a directional shift.”

The pact eclipsed a decision by Husky Energy and BP to proceed with the first phase of their 200,000 b/d Sunrise project, reaffirming a pledge by newly installed chief executive Asim Ghosh that Husky was about to be jolted to life after slumbering through the previous 17 years and paying the price for missing production guidance.

Under its established joint-venture with Husky, BP will cover the full cost of Sunrise’s C$2.5bn, 60,000 b/d first phase, but the partners have yet to disclose their plans for reconfiguring BP’s Toledo, Ohio, refinery to handle the resulting heavy crude when it starts flowing in 2014.

The industry’s return to a world of big-box operations has George proclaiming a “vote of confidence” in the “second-largest oil base in the world”.

And there’s no shortage of observers ready to predict more joint ventures within the private sector and a growing presence by state-owned companies from China, South Korea, Thailand and possibly India as they join start-up companies using various thermal technologies to recover the estimated 82% of Alberta’s bitumen that is buried too deep to be recovered by open pit mines.

But, unless they in turn are toppled from their perch, Suncor and Total will be the guiding light over the next decade as they test every challenge facing the oil sands, above all their ability to manage construction costs and avoid the punishing inflation of the 2004-07 period when labour and materials costs often exceeded budgets by 50% or more.

George admits the Suncor-Total slate of projects may result in cost pressures, although he says the partnership will exert more power over how much work is done and when, as well as building more components off-site and asking contractors to shoulder part of the inflation risk. “You have to remember that we’re the biggest player, so we’ll have a lot of direct influence,” he says.

Others are less sanguine. Phil Skolnick, managing director of equity research for Canaccord Genuity, has no doubt “it’s going to be a mess again. Everyone is talking about joint ventures to accelerate value. Not everybody can do that.”

Ever the pragmatist, George acknowledges the “biggest risk, the biggest challenge, is to get enough manpower on these projects”.

Indications of a widening price gap between building open-pit mines and thermal, in-situ recovery projects gives investors their first opportunity to choose where to put their money in the oil sands. On the surface, that case can be compelling.

Imperial Oil’s Kearl mine, due to start production in 2012, carries a capital-expenditure tag of C$70,000 per flowing barrel and Suncor’s mines run to C$60,000/b. In contrast, Suncor’s own Firebag in-situ development is budgeted at C$30,000-35,000/b, while Cenovus Energy says it can drag costs as low as C$20,000/b.

Long-term business viability

However, Chris Lee, with Deloitte Canada, a financial services firm, says the move by one-time rivals to join forces and deal with environmental pressures, regulatory changes and rising capital costs, will advance the “long-term business viability”.

One of the big unknowns for 2011 is what steps the Canadian and Alberta governments will take to reduce carbon emissions. Expecting carbon prices averaging C$40 a tonne (compared with the Alberta government’s levy of C$15/t), some operators, such as Shell and Nexen, are factoring an additional C$2-3/b into their production costs – not remotely enough in a world of $90-plus oil to deter Suncor and Total from their ambitious goals.

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