August 18, 2014
A report from London-based think tank the Carbon Tracker Initiative made headlines among energy investors last Friday. The report cited data from Rystad Energy when listing 20 E&P megaprojects claimed to be unprofitable at current oil price levels. Topping the list was Cenovus’ and ConocoPhillips’ Foster Creek joint venture, a project known for having pioneered the in-situ/SAGD extraction of Alberta oil sands. This technology is now gradually replacing the mining technology that has a larger ecological footprint.
Rystad Energy’s source data however tells a somewhat different story: Out of a total of ten development stages for the Foster Creek area, only the last unsanctioned phase J comes out with a high breakeven price in initial analyses, and this before the JV partners have published any cost estimates.
As an independent third-party seeking to provide transparency in the global E&P industry, Rystad Energy’s approach is always to apply early estimates relatively conservative as compared to operators’ first estimates. Best-in-class operators would typically do better than our estimates thanks to technology improvements, de-bottlenecking and increased attention to costs.
To pay down initial capital costs of 50,000 USD per daily barrel with adequate returns, these projects would typically require operational netbacks of at least 40 USD/bbl after royalty, operational costs and price spreads. This has not been achieved on all projects so far, but SAGD flagships like Foster Creek, Surmont and Christina Lake are clearly candidates for profitable expansion when scrutinizing our databases with unbiased eyes.
Per Magnus Nysveen, Head of Analysis at Rystad Energy, says: “Alberta heavy oil will be a valuable supplement to US light oil to satisfy the increasing global demand for diesel and jet fuel. Our detailed data also shows oil majors’ resource base amounts to 40 times their annual production and 85% of those resources will provide a return on capital of at least 10%. So we believe these industry leaders can make sustainable profits for decades to come, especially on their SAGD brownfield projects “.