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Oil sands coping on the cusp of change

Canada's big four producers are profitable at $50 oil, but the growth outlook is murky

On 1 August, former Suncor chief executive Rick George died of complications from leukemia at the age of 67. The passing was significant because more than any other man, George is widely acknowledged as the one who ushered the oil sands into the modern era.

In 1995, George took over a struggling Suncor and completely reorganised its oil sands division, which had been pumping heavy crude since 1968. As today, he took over at a time when the oil sands' fate looked bleak and many thought it was too expensive to compete. He responded by changing the face of the oil sands, retiring the massive draglines and replacing them with the iconic trucks and shovels that have become emblematic of today's oil sands. The innovation set Suncor up for a new era of growth amid the doubts. His C$19bn ($15.01bn) merger with Petro-Canada in 2009 is still the largest oil sands takeover to date.

George's passing comes as Canada's oil sands patch once again finds itself on the cusp of change. Faced with the rise of shale and a looming carbon-constrained future, the oil sands will once again be forced to reinvent itself if it is to remain a viable proposition. Much of the international oil industry has voted with its feet, selling off their oil sands properties to a core of four Canadian companies—Suncor, Canadian Natural Resources, Imperial Oil and Cenovus—that now control over 70% of output.

First they'll have to overcome the vagaries of global oil markets. On that front, the more is less strategy appears to be paying off. The sector has become lither, reducing costs even as they have bulked up on acquisitions from the fleeing international oil companies.

Suncor reported second quarter net earnings of C$435m, compared to a loss of C$735m in the same period last year (which was hit hard by the fires in Fort McMurray). Nonetheless, it was an impressive performance given sub-$50 oil prices for much of the period. Suncor is expecting its full year cash costs per barrel to come in at just C$23/b, a modern-era low.

Likewise, Canadian Natural Resources—which bought Shell Canada's oil sands business in May for C$4.1bn—posted net earnings of C$332m, up from losses of C$210m the year before. The Shell acquisition, which closed on 31 May, added 289,000 barrels a day of production and lowered Canadian Natural's overall production costs to C$22.08/b.

Cenovus' profit jumped to C$2.64bn in the second quarter compared to a loss of C$264m in the same quarter last year. The production added after the company's $13.3bn purchase of ConocoPhillips' assets helped boost cash flow and output, which at 437,000 b/d was 65% higher than a year earlier.

Of the major oil sands producers, only Imperial Oil, which is majority owned by ExxonMobil, struggled. The company reported a C$287m loss—down from C$738m last year—as it copes with lower output from a fire at Syncrude earlier this year. Even with the reduced rates the company produced about 300,000 b/d.

Carbon constraints

The results show that oil sands producers have successfully reduced output costs to a point that they can be profitable in a sub-$50 oil-price environment. That is no small feat. But a separate, and bigger, question is future growth in an era of carbon taxes and looming emissions caps.

Some growth is already in the pipeline. The third phase of Canadian Natural's Horizon expansion is expected to come online in September, increasing that mine's capacity to 250,000 b/d. Suncor's Fort Hills mine is 90% complete and will come on stream in late 2018, adding another 200,000 b/d when fully up and running. Some say the C$15bn mine will be the last of the oil sands megaprojects.

The path forward from there becomes murkier. In December 2016, the Alberta government imposed an emissions cap of 100 megatonnes (mt) of carbon dioxide per year on the sector. Oil sands operators are producing around 60/mt a year and aren't expected to bump up against those limits until 2027, leaving room for output to nearly double.

However, the federal government is also implementing a C$50 per tonne carbon levy by 2020 that has the potential to alter oil sands economics barring a step change in emissions reduction technology.

Despite the challenges, Rick George always claimed to be an optimist in the face of extreme adversity. He implemented some of the industry's earliest environmental sustainability programmes that have long since become the norm and expressed confidence to his last days that the oil sands would overcome those challenges. His faith will be put to the test.

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