Canada’s Mordor, as environmentalists like to call the oil sands, is notorious for how “dirty” oil extraction is there. It’s also notorious for how expensive it is to extract. The dirt argument, which concerns the energy intensity of oil sands production compared to other oil extraction methods, has been partially refuted: some oil production in California is dirtier than oil sands. The price argument is also being refuted by the producers themselves: oil sands extraction is becoming cheaper, and it is rising.
Oil sands production has historically had some of the highest production prices in the industry due to the complexity of the process that turns bitumen into fluid crude oil. Like their peers in the shale patch, however, oil sands miners were motivated to increase their efficiency during the recent price crash. The results from this boost are now becoming evident.
Earlier this week, the Canadian Association of Petroleum Producers reported a forecast that the industry will reduce its spending for the third year in a row in 2017—to US$11.3 billion (C$15 billion). This is compared to US$25.6 billion (C$34 billion) spent in 2014.
One interpretation of this forecast is that international pries are still weak, and this fuels uncertainty about growth prospects. In other words, oil sand miners are being cautious.
Yet this is not the whole story, especially if we look at another recent release, this time from HIS Markit. According to the market researcher, oil sands output will grow by half a million barrels daily in the current financial year—despite lowered spending. This means that Canada’s oil sands will be the second-largest source of oil supply growth, after the U.S. shale patch. Related: How A $200,000 Well Could Drastically Change The Oil Industry
Production growth is not generally seen as a sign of weakness in an industry. It’s quite the opposite, in fact, so this output growth after the recent Big Oil exodus from the oil sands may look confusing. Yet Big Oil has its own agenda: focus on quicker-return, lower-cost projects anywhere in the world. Canadian oil sands miners, on the other hand, as Wood Mackenzie expert Michael Hebert noted in a recent analysis of the industry, are much more locally focused, reinvesting solidly in projects at home rather than seeking international expansion. In their case, production growth is the only way to go, pretty much like shale drillers.
To date, about 70 percent of all Canadian oil sands projects are the property of the four biggest local companies in this sector. That’s a major consolidation that will motivate more efforts going into further improving production efficiency, while at the same time, reducing the energy intensity of oil sands production. With the exit of Shell, Conoco, and Marathon, Canadian energy companies can now only rely on themselves to come up with better mining and processing technology to optimize their production, bringing down costs.
According to Wood Mac’s Hebert, project optimization along with boosting operating efficiencies will be the two drivers behind growth in the oil sands industry in the near term. According to IHS Markit’s Kevin Birn, growth in the industry will come from raising output from existing projects rather than launching new ones, and from improving their utilization rates.
In a sub-$50 price environment, this seems like the best course of action. Despite all the efficiency and utilization rate improvements already made, oil sands extraction remains a high-cost production method compared with conventional oil and shale.
By Irina Slav for Oilprice.com
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