Tough times ahead for Canadian oil sands

May 2, 2016

Authors: Olga Kerimova, Senior Analyst, and Theodora Batoudaki, Analyst, Rystad Energy

Publisher: PESGB Newsletter, May Edition

Production from Canadian oil sands is expected to grow over the next five years mainly thanks to major mining projects currently under construction and coming online in late 2016/2017. However, activity is expected to slow down considerably after the planned projects are completed and put on production. This article assesses the outlook for the Canadian oil sands, illustrated by three key drivers: production, breakeven prices and spending. 

Figure 1 shows the total production for the Canadian oil sands by lifecycle over the period 2010-2020. Production is expected to increase from around 2.1 million boe/d in 2015 to 2.8 million boe/d by 2020. Currently, producing fields show an increasing production trend in the short-run due to 2015 start-up of large-scale projects, such as the expansion phase of Kearl (Imperial Oil), Surmont phase 2 (ConocoPhillips) and Sunrise phase 1 (Husky Energy), as displayed in Figure 2.  Production from these fields is expected to stabilize at around 2.4 million boe/d post 2017, when the aforementioned projects reach maximum capacity. 

From 2017 and onward, the driver of production growth are projects under development. As shown in Figure 2, the most substantial supply additions from 2017 to 2020 will come from expansion phases of Horizon (CNRL) and the megaproject Fort Hills (Suncor). According to Suncor’s and CNRL’s latest communication, Fort Hills phase 1 is expected to come online in late 2017, Horizon phase 2B in October 2016 and Horizon phase 3 in Q4 2017. The contribution of unsanctioned projects is insignificant, as operators delay the decision for further sanctioning of projects amid uncertainty over the oil prices.

Figure 3 shows Brent-equivalent breakeven prices for mining and in situ projects by lifecycle. Mining includes both upgraded (synthetic crude) and non-upgraded mining projects (bitumen), such as Fort Hills. In situ includes mostly bitumen projects, but also a few upgraded, such as Long Lake (CNOOC). Sanctioned projects (under development lifecycle), with part of their initial development cost already sunk, have lower breakeven prices across both recovery methods, as expected, compared to discoveries (unsanctioned projects). In situ projects have lower breakeven prices compared to mining due to significantly lower initial development cost and lower operating cost. Indeed, for in situ projects initial development cost can be ~70% lower and non-energy operating cost 50%-60% lower than the respective costs of upgraded projects. With regards to future sanctioning, in-situ projects appear more attractive than mining due to their lower average breakeven prices of 85 US$/bbl, which makes them relatively competitive in the long-run, with the recovery of oil prices. However, the lack of pipeline capacity could possibly result in deferral of sanctioning in the future, with several high-breakeven price mining projects at stake.

Figure 4 shows the total spending 2010-2020 in Canadian oil sands. Investments (Capex) are expected to decrease from ~US$17.1 billion in 2015 to ~US$11.3 billion, in 2016. This reflects the reduction in activity as a response to lower oil prices, but also the completion of major projects, such as Surmont Oil phase 2 (Total 50%/ConocoPhillips 50%), Imperial Oil’s Kearl expansion phase, and Sunrise phase 1 (Husky), that were completed and came online in 2015. The declining trend is expected to continue in 2017-2018 and is explained by lower investments due to delays in sanctioning, and cost cycling. The growth in investments from 2019/2020 is driven mainly by the sanctioning of new projects, such as Imperial Oil’s Aspen phase 1 and Cenovus-operated Christina Lake phase G, which is highly dependent on the recovery of oil prices and pipeline capacity considerations. Investments are expected to average ~US$12 billion from 2015-2020. Operational expenditure (Opex) is expected to increase from around US$14 billion in 2010, to almost US$33 billion in 2020, consistent with the production trend shown in Figure 1.

Conclusion

Oil sands production is estimated to grow by 33% from 2015 to 2020, with substantial additions from the producing and sanctioned projects Kearl, Surmont, Sunrise, Horizon and Fort Hills. The contribution from unsanctioned projects is not likely to be visible before 2020, as operators postpone their final investment decisions. Among unsanctioned projects, in-situ projects are relatively more attractive than mining due to lower breakeven prices. The slowdown in activity is driven mainly by low oil prices, high up-front and operating costs that are reflected in relatively high breakeven prices for oil sands, increasing production 2015-2020 in tandem with limited pipeline capacity that might lead to oversupply and lower realized prices.

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Article Contacts

Contact: Olga Kerimova, Analyst
Phone: +47 24 00 42 00
olga.kerimova@rystadenergy.com

Contact: Theodora Batoudaki, Analyst
Phone: +47 24 00 42 00
theodorab@rystadenergy.com

About Rystad Energy

Rystad Energy is an independent oil and gas consulting services and business intelligence data firm offering global databases, strategy consulting and research products.

Rystad Energy’s headquarters are located in Oslo, Norway, with additional research teams in India. Further presence has been established in Norway (Stavanger), the UK (London), USA (New York & Houston), Russia (Moscow), Brazil (Rio de Janeiro) and Singapore.