* No drop seen in current production
* Projects without committed funding face biggest risks
* Competition from Bakken adds new wrinkle
By Jeffrey Jones
CALGARY, Alberta, June 4 Falling oil prices are
rekindling fears that Canada's oil sands industry could start to
put some projects on the back burner, like it did in the last
financial crisis, to cope with weakening returns and stubbornly
So far, development in Northern Alberta has stayed on pace
as West Texas Intermediate crude sank to current levels around
$84 a barrel, from more than $104 six weeks ago, and no analysts
are calling for large volumes to get shut in.
Still, some marginal developments without money committed
may be shelved if world oil prices remain low amid a worsening
global economy while an oversupply of Canadian crude floods into
the U.S. Midwest market, spelling ever-deeper discounts.
"Oil sands projects display some of the highest break-evens
of all global upstream projects. The potential for wide and
volatile differentials could result in operators delaying or
cancelling unsanctioned projects," Wood Mackenzie Ltd said in a
report on Monday.
"Pure-play oil sands companies without hedges in place, such
as a U.S. downstream position, are the most exposed."
FACTBOX-Planned oil sands start-ups by 2016
In 2008 and 2009, more than $80 billion worth of
developments were shelved, rejigged or canceled outright when
oil sank below $40 a barrel and corporate credit dried up. But
since then investments have roared back.
The industry currently predicts oil sands output could hit 3
million barrels a day by 2020, up from the current 1.6 million,
and at least one analyst believes that to be a conservative
Some projects say production could bump up against export
capacity as early as 2016, a major factor in the industry's and
Ottawa's push to advance TransCanada Corp's (TRP.TO) Keystone XL
pipeline to Texas and Enbridge Inc's (ENB.TO) Northern Gateway
pipeline to the Pacific Coast against protests from
environmental groups and some native communities.
WoodMac noted an unprecedented 16 bitumen projects are
slated to start up by 2016 with potential to add more than 1
million bpd of production.
FACING OFF AGAINST BAKKEN
Still, companies face growing risks, including a tightening
skilled labor pool, clogged pipelines to U.S. markets and, most
recently, competition for pipeline space and refinery purchases
from North Dakota Bakken shale oil, output of which is forecast
to double to 1.2 million bpd by 2015, it said.
"It's now a new concern that oil sands operators have to
handle, besides looking at costs and labor," said Mark
Oberstoetter, one of the report's authors.
Even before the recent drop in U.S. benchmark crude, oil
sands producers were hit this winter by gaping discounts for
their extra-heavy crude due to tight pipeline capacity and a
glut of supply in the U.S. Midwest and Midcontinent regions.
With a discount quoted on Monday at $25 a barrel under WTI,
Western Canada Select heavy blend, a frequently quoted oil
price, was worth around $59 a barrel, a few dollars below even
the depths of the first quarter.
Still, only the smallest and most indebted oil sands players
will be put under enough financial strain to force some
production off line, said Samir Kayande, analyst at ITG
Investment Research in Calgary.
He pointed to Connacher Oil and Gas Ltd CLL.TO, which shut
some operations during the last financial crisis and has
struggled with high debt and management changes, as having among
the highest chances turning off output again. However, its total
bitumen output was 12,429 bpd in the first quarter, a tiny
fraction of Canadian production.
For the large producers that use stream-assisted gravity
drainage, or SAGD, technology to pump oil sands crude, such as
Cenovus Energy Inc (CVE.TO), cash costs of production are around
$25 a barrel or less, Kayande said.
Unlike open-pit mining, SAGD involves injecting steam into
the ground to loosen up the tar-like bitumen so it can be pumped
to the surface in wells.
"So as long as you're achieving that in terms of your
revenue, which implies a lower-than-$40 WTI price, you're
probably OK," he said. "You're not going to shut in as long as
you're making cash flow."
Production costs for integrated oil sands mining and
upgrading operations, such as the 350,000 bpd Syncrude Canada
Ltd and Suncor Energy Inc (SU.TO) ventures, are in the $35 a
barrel range. Their light, synthetic crude currently sells for
less than $77.75 a barrel, still leaving a healthy margin.
But break-even costs for building new steam-driven projects
are in the $65-$70 a barrel range and mining developments need
at least $90-$100 oil, Kayande said. Upgrading pushes break-even
levels well above $100 a barrel.
"The reason we see mining and upgrading economics as being
worse is your (price) spread is similar to what you would get in
the Gulf Coast, but your costs are 50 percent higher," he said.
However, last week, Royal Dutch Shell (RDSa.L) chief
executive Peter Voser said last week his i ntegrated oil sands
operation can add up to 90,000 bpd by the end of the decade by
"debottlenecking" the current 255,000 bpd operation at a cost of
under $50 a barrel.
(Editing by Sofina Mirza-Reid)
Keywords: CANADA OILSANDS/
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