The Fuse

Oil Sands Long-Term Growth Looks Increasingly Shaky as Majors Flee Alberta, Suncor Pivots

by Nick Cunningham | July 07, 2017

Producing oil from Canada’s oil sands is extraordinarily expensive, and projects take years to develop, despite having the benefit of decades of stable and consistent output. Shale is the opposite in many ways with shorter lead times and relatively low upfront costs. In a world where oil prices are low and volatile, the industry is placing a high premium on comparatively low-risk shale drilling.

In the current price environment, the Canadian oil sands have seen an exodus of top oil companies recently as the oil market downturn extends into its third year, with little relief in sight.

In the current price environment, the Canadian oil sands have seen an exodus of top oil companies recently as the oil market downturn extends into its third year, with little relief in sight. Several oil majors have exited the high-cost region, decamping for shale plays in Texas. In March, Royal Dutch Shell agreed to sell $8.5 billion worth of oil sands assets to Canadian Natural Resources. That move was eclipsed by the $13.3 billion sale of ConocoPhillips oil sands operations in the same month. Chevron is considering unloading its 20 percent stake in the Athabasca Oil Sands project in a deal that could bring in $2.5 billion. Meanwhile, ExxonMobil took 3.5 billion barrels of oil reserves off of its books earlier this year, admitting that its Canadian oil sands assets were not viable in today’s oil market. Most of these companies are aggressively pivoting to U.S. shale.

“This is all part of efforts by the global majors to move down the cost curve towards more advantaged assets,” said Tom Ellacott, head of corporate research at Wood Mackenzie, according to the FT.

Suncor turns oil sands into cash

The oil majors, for the most part, sold their Alberta assets to Canada’s traditional oil sands operators, including Canadian Natural Resources, Cenovus Energy, and Suncor Energy.

Despite the depressed market environment, Suncor Energy is doing surprisingly well, as it expands its footprint in Canada’s oil sands while its international peers leave. Suncor spent billions to take a controlling stake in the massive Syncrude project last year, which can produce 350,000 barrels per day (b/d). Company management believes it bought at the bottom of the market downturn and will be able to grow its production base at a reasonable price.

Despite the depressed market environment, Suncor Energy is doing surprisingly well, as it expands its footprint in Canada’s oil sands while its international peers leave.

Suncor is also set to bring another large project online by the end of the year. The Fort Hills project will begin producing by the fourth quarter of 2017, and will ramp up to 90 percent of its planned 194,000 b/d capacity within 12 months.

Now, however, Suncor is at a crossroads. After years of heavy spending, along with making major acquisitions during the downturn, the company has promised shareholders it will not spend more money on new oil sands projects. Suncor is taking a radical approach of forgoing large-scale exploration and development in the oil sands in favor of returning cash to shareholders. The company is undertaking a $2 billion share buyback program over the next year, which comes after a 3-cent-per-share dividend hike earlier this year. “We’ve decided to let the shareholders see the cash,” CEO Steve Williams told the Wall Street Journal in an interview. “We can continue this model for a lot longer.”

After years of heavy spending, along with making major acquisitions during the downturn, Suncor has promised shareholders it will not spend more money on new oil sands projects.

Suncor has not ruled out new acquisitions, but the company says it will be selective about its purchases. Having already bought up larger stakes in the Fort Hills oil sands project from French oil giant Total two years ago, giving it more than a 50 percent stake, Suncor has pondered the possibility of buying up more of the project if Total wanted to completely exit. “I often get asked, would I want more of it?” Suncor’s CEO Steve Williams told reporters at the company’s annual shareholder meeting in April. “At the right price, it might be possible, but it’s not at the top of my agenda.”

Investors have rewarded Suncor with this approach. As the WSJ notes, Suncor outperformed every major oil company in North America for the 12 months to May 2017. With energy stocks down across the board for much of the past year and the company operating in some of the most expensive oil resources in the world, the performance is eye-opening.

Future of oil sands in doubt

While Suncor has fared better than most in the oil industry, it is important to emphasize that investor enthusiasm is predicated on a rather extraordinary strategy of limiting growth. That strategy takes a path different than most oil companies have taken historically. Their success has long been based on proven reserves and growth potential, at times even above profits. While it may be a reasonable approach for Suncor, it is a reflection of the problems surrounding Canada’s oil sands.

Suncor has trumpeted its declining operating costs, pointing to cash costs of $17 per barrel, which are on par with some of the better shale plays in the U.S. But that does not account for the sky-high capex needed to develop a new project. Suncor’s prospects look reasonably bright only because it has a lot of existing production at facilities that could continue to operate for decades. Greenfield projects, however, with the billions of dollars of startup costs that they entail, look increasingly out of reach, particularly because analysts are confident that oil prices won’t return to triple-digit territory in the short run.

The IEA sees Canada adding roughly 900,000 b/d of new production by 2022, but beyond that, the growth prospects look dim.

As a result, as the current queue of oil sands projects reaches completion, there will be few, if any, coming after them. To be sure, there are still a handful of projects planned years ago that have yet to come online. The Fort Hills project, as mentioned, will add nearly 200,000 b/d next year—and it is poised to operate for 50 years. The IEA sees Canada adding roughly 900,000 b/d of new production by 2022.

But beyond that, the growth prospects look dim. The upshot is that Suncor and other incumbents might survive, and perhaps even thrive, but they will do so using their existing assets. “The future of the oil sands is to forget about growth, manage assets well and become a yield play,” Rafi Tahmazian, senior portfolio manager at Canoe Financial Corp., a Calgary-based investment fund, told the WSJ.

That means supply growth in North America will likely come largely from U.S. shale, which is already a problem for some of Alberta’s operators. TransCanada is reportedly struggling to line up enough customers to move forward with its proposed Keystone XL pipeline. With existing production facing a stiff market, new oil sands projects might remain too risky for most companies. Suncor Energy’s strategy of handing over much of its cash flow to investors is a sign that oil sands face a rocky future.

 

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