A reality check for the promise of the oil sands – by Nathan Vanderklippe (Globe and Mail – September 22, 2012)posted in Canadian/International Media Resource Articles, Oil and Gas Sector-Politics and Image |
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AT THE JOSLYN NORTH MINE PROJECT — To build an oil sands mine, you start by tearing away the forest. You rip down trees, peel back the top layers of earth, and then cleave ground into carefully engineered trenches to divert rainfall and snow melt.
It’s a complex effort, compounded by the enormous scale and cost. Here at the Joslyn project 90 minutes northwest of Fort McMurray, French giant Total SA is clearing the way for a new $8-billion mine that is a major backbone of the next chapter in the oil sands.
It is a future that is already being stamped onto the landscape with heavy machinery by dozens of companies across hundreds of kilometres of boreal forest. It promises a coming decade that will see the oil sands double in output, elevating Canada to greater prominence on the global energy stage.
But the oil sands’ next chapter is suddenly in the midst of a major rewrite. Joslyn itself has become a symbol of both the eager ambition the world’s oil companies have brought to northeastern Alberta, and the question marks surrounding how those ambitions will be realized. The economics of Joslyn, along with two other projects that are pillars of oil sands growth, have been placed under review by partner Suncor Energy Inc. The company has abandoned lofty growth targets in favour of a rigid focus on costs, and has even said it could abandon some projects.
That scrutiny comes amid a broad moment of reckoning for an industry that has spent most of a decade in frenzied construction. Now, amid sagging share prices and profits held back by price shocks, the oil sands industry is being forced to contemplate how profitably it can build new projects. No one expects growth to stop. It may, however, slow as question marks rise over a sweep of spending plans formulated by companies now concerned that weaker global demand and surging U.S. production will soften future oil prices.
The oil sands have been in this place before. In 1989, Syncrude Canada Ltd. was faced with such high costs that its profits largely vanished. Syncrude spent half a decade arduously wringing out better performance from its assets – a time in which its new project growth largely ground to a halt.
Some now believe the oil sands is due for another dramatic check. In a decade and a half, the cost to produce a barrel from an oil sands mine has risen from under $14 to, in some cases, over $40 – a tripling in costs over a period when Canada-wide inflation rose just 37 per cent. Meanwhile, capital costs for oil sands mines jumped more than fourfold in the past decade. And selling prices for Canadian producers are under pressure due to transportation bottlenecks. Raymond James calculated earlier this year that heavy oil producers were receiving just $45 (U.S.) a barrel, though recent prices have been stronger.
“Industry has to have a bit of a recalibration again,” said Jim Carter, who oversaw the cost-cutting at Syncrude, where he was president from 1997 to 2007. That means “focusing on those operating costs, and making it more efficient as opposed to adding more capacity.”
Mr. Carter is not the only one suggesting a pause might be needed in the oil sands, a time to pare back the big numbers industry has long promoted – how many barrels a day they would produce in five and 10 years time, and how many billions they would spend to get there – and focus instead on how much inefficiency it can shed.
In part, that’s because larger factors, including concerns about oil prices, have had a real impact on the viability of future oil sands projects. “What may have looked like a fairly low-risk proposition may all of a sudden be the subject of a lot more discussion,” said Leo de Bever, chief executive officer at Alberta Investment Management Corp., or AIMCo, which manages some $70-billion in provincial funds.
For the rest of this article, please go to the Globe and Mail website: http://www.theglobeandmail.com/globe-investor/the-oil-sands-day-of-reckoning/article4560688/?page=all