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ANALYSIS: Collapsing crude oil prices may not curtail the ambitious growth plans of Alberta’s oil sands producers, but they will at the very least temper their timelines.
According to the latest estimates from the Canadian Association of Petroleum Producers (CAPP), Canadian oil sands production is expected to reach 2.3 million barrels per day (bpd) this year and grow by another 900,000 bpd over the next five years, reaching 3.2 million bpd by 2020. Yet with hundreds of thousands of daily barrels worth of oil sands expansions having already been deferred as oil prices have been cut in half since that CAPP forecast was released, the official projection is less of a realistic goal and more of a pipe dream.
Fort Hills, a $13.5-billion mining project being jointly developed by Suncor Energy, Total and Teck Resources, is expected to bring up to 180,000 bpd of new production into the market by the end of the decade, with initial production starting in 2017. The project was delayed once before in 2008, when oil prices fell even more steeply than the current (and ongoing) collapse. While the companies say they are still committed to moving forward with Fort Hills despite the recent drop in oil prices, a growing chorus of analysts are anticipating at least a small step back.
Norman MacDonald, a portfolio manager for Trimark Resources Fund, told BNN this week that US$90 per barrel prices for West Texas Intermediate (WTI) will be needed if Fort Hills production is going to break even and US$5/bbl more if the project is going to make a relatively meager 12-percent return on capital employed.
“Wow,” BNN’s Commodities guru Andy Bell said in response.
Wow is right, especially when considering Fort Hills is far from the only Alberta oil sands project facing a delay. Major producers such as Cenovus Energy and MEG Energy have already quietly announced deferrals for projects totaling a combined 550,000 bpd (MEG’s 150,000 bpd Christina Lake expansion and Cenovus’ 130,000 bpd Narrows Lake, 180,000 bpd Grand Rapids and 90,000 bpd Telephone Lake projects). That production is still expected to come online eventually, but the exact timing is now uncertain.
Chris Cox, senior oil sands analyst at Raymond James, told BNN via email on Wednesday that five more oil sands projects might have delays if the low oil price environment persists. The following is not an “exhaustive” list, Cox cautioned, but does collectively, represent several hundred thousand barrels of daily production that may have a problem making profits without a significant rebound in prices.
Nearly a month ago, on Dec 8th, 2014, when WTI was still in the mid-70s, Cox warned oil sands growth could essentially stop unless prices return to their pre-crash levels.
“There’s probably about 2 million bpd of [oil sands] growth that doesn’t work in our view at $75/bbl or lower,” Cox said at the time. “If you ran [that] price in perpetuity, there really isn’t anything of noticeable significance [in the oil sands] that would make economic sense.”
Prices have fallen by nearly another $30 per barrel since then. Even though oil sands producers remain quick to point out theirs are longer-term projects intended to withstand multiple price dips over their 40-year timelines, it seems increasingly likely at least a few of those timelines will need to start a few years later than planned.
Jameson Berkow is BNN's western bureau chief based out of Calgary. Every weekday morning he researches the top stories affecting commodities and the oil patch, and sends his analysis to the BNN newsroom in Toronto. You can follow him on twitter @crudereporter