Industry on the road to recovery

Oilsands Review — By the end of 2008, the next year was looking anything but positive for the oilsands industry—and it wasn’t. Billions of dollars worth of projects were put on hold and thousands of people were laid off in the midst of a growing storm of environmental criticism.

The price of oil may have come back, the value of heavy oil is strong, and the global economic recpvery appears to be slowly taking hold, but the challenges for the oilsands industry are far from over. Look inside Oilsands Review’s 2010 crystal ball and see our Ten Things to Watch in 2010.

1. Coming off the shelves—projects to move forward in CERI’s window of “golden opportunity”

In the fall of 2009, the Canadian Energy Research Institute (CERI) released a study saying, in part, that this is a time of “golden opportunity” for new oilsands projects, a result of reduced construction capital costs and operating costs over the preceding 12 months.

However, research director David McColl says that this golden window is likely to last only into the first few months of 2010.

“The gains that a project has going ahead today will be eaten up in three to four years, but mostly in 2010.”

McColl says this is because of capital cost inflation specific to megaprojects such as labour and materials. He expects there will be a short surge in new projects—including renewed investment in deep offshore projects internationally—that will quickly bid up costs once again.

2. Continued narrow differentials = profits but not much need for new Alberta upgrading capacity

The price of Canadian heavy oil relative to the price of its lighter counterparts—the heavy oil differential—is likely to remain tight in 2010, continuing the appeal of producing diluted bitumen rather than investing in new upgrading capacity within Alberta. In what is likely not a surprise, the relationship is defined by the metrics of supply and demand.

“With Venezuela taking their heavy out of the U.S. market and the Mexican supply going into natural decline from its big fields, there is existing upgrading capacity looking for supply in the Gulf Coast. In addition there are several refiners in the U.S. Midwest shifting from offshore supplies to more Canadian supplies and expanding their heavy upgrading/refining capacity, again adding more upgrading. On top of this, the bitumen/heavy oil supply growth from Canada has slowed due to the financial crisis and other factors. The balance is likely to persist for a while,” says Greg Stringham, vice-president of oilsands and markets with the Canadian Association of Petroleum Producers (CAPP).

Colin Outtrim, president of petroleum consultancy DeGolyer and MacNaughton Canada, says that balance may tighten even further.

“We are forecasting that the differential will narrow a little more as more of the refiners are able to take more heavy fractions into their blend. This is good for Alberta.”

That said, Outtrim continues that the current supply/demand balance will likely mean for a continued lack of new upgrading capacity in Alberta.

“I would like to see us expand upgrading capacity and keep more of the ‘value add’ in Canada, but I’m afraid to say that the U.S. refiners can enhance their ability to accept heavy crude more cost-effectively than we can, so increased upgrader capacity may be slow to grow north of the 49^th.”

3. Communicating the message: don’t ignore Conversation 2.0

While production companies already do a good job at local community consultation, they could quite possibly continue to miss the boat in getting their broader message across in 2010. That’s according to Anne Stone Johnson, a Calgary-based vice-president with global public relations consulting firm Weber Shandwick. “As the price of oil goes up, the scrutiny will increase,” she says, adding that the general public is largely unaware of the “above and beyond” work that many companies do in people, technology, and sustainability. “It’s an exciting time and things are humming and people don’t know.”

Stone Johnson notes that letting the public know about the benefits of energy production and discussing the issues around it will increasingly hinge on industry’s involvement in social media venues.

“Social media is going to get bigger and bigger. Producers ignore it at their peril.”

She acknowledges the efforts of industry at using social media such as Twitter, but believes these connecting opportunities are currently seen as an investor-relations function—a modern way to distribute news releases.

“They’re not doing it the way their opponents are. They don’t get it. They need to get engaged in the dialogue. The [non-governmental organizations] and concerned stakeholders with online profiles are back and forthing. They’re listening and discussing,” says Stone Johnson. “It doesn’t make me believe [industry] wants to talk, and I think they do want to talk….Social media is definitely not just a flash in the pan.”

4. Eye on the environment: progression of the “stop the tar sands” movement.

Oilsands protesters had a raging year in 2009—especially Greenpeace, which successfully occupied production and processing installations three times in the course of a month, unfurling its banners and communicating its message to global followers in real-time across the Internet.

The future of this movement, says Pembina Institute oilsands director Simon Dyer, will be directly related to the actions of government. Pembina is not directly involved with this movement, although it does express significant concerns about the oilsands industry.

“The level of opposition hinges on whether the governments of Alberta and Canada really address the environmental issues. If they are not addressed, I would expect the level of opposition to continue to escalate. It seems to be spreading,” says Dyer. “The big question is whether Canada is going to seriously deal with greenhouse gas emissions.”

Dyer says there are a number of environment-related developments to watch for in 2010, including completion of analysis of mining producers’ plans to meet the Alberta Energy Resources Conservation Board’s new tailings management regulations.

5. Production growth: expect focus to be on ramping up capacity and efficiency improvements

Some oilsands projects may be coming off the shelves, but that does not mean a flood of new production in 2010. In fact, the only projects expected for completion in the next year are Shell’s 100,000-barrel-per-day expansion of its mine and upgrader, and Connacher Oil and Gas’ 10,000-barrel-per-day second pod of its Great Divide steam assisted gravity drainage (SAGD) project.

“Don’t expect much incremental growth in 2010,” says CERI’s McColl, adding that the industry will see, however, continued ramp-up of projects already commissioned such as Canadian Natural Horizon and a slew of relatively new SAGD projects. “[There will be] a move toward capacity and efficiency improvements.”

CERI predicts there will be about $8 billion invested in the oilsands in 2010, a substantial portion of that directed at projects that will come online in 2012–2013, a reflection of the scale and complexity of the oilsands.

“You’re not just pulling out a rig and six months from now producing.”

6. The environment and the government agenda: expect carbon legislation in 2010

Perhaps the biggest headwind facing the oilsands industry in 2010 is environmental legislation coming out of Washington, says Houston-based consultant Robert Peterson, vice-president with Charles River Associates.

Ottawa and Alberta are not likely to kill the goose that lays the golden egg by imposing greenhouse gas regulations and containment costs that would threaten future expansion, he says, but he’s not as certain Washington will do the same. Peterson points to varying bills from California congressman Henry Waxman and Massachusetts senator John Kerry that would impose challenging cap-and-trade regulations and carbon taxes.

“It is highly likely that [sometime in 2010] we will have cap and trade and a carbon tax. Industry will have to be prepared to invest in carbon offsets or carbon management technologies [to cope with U.S. standards]. It’s almost certain there will be a cost of carbon for heavy oil producers.”

7. M&A: interest swapping to continue

There could be a lot of movement in industry transactions in 2010, with significant project interests already up for grab such as Opti’s stake in the integrated Long Lake SAGD project and ConocoPhillips’ piece of Syncrude. Of course there are also rumours and speculation afoot, including the recent McDep pronouncement that Canadian Oil Sands Trust is the “single most attractive oil acquisition target.”

“I think these positions will sell and there will be a bit of a scramble,” says DeGolyer and MacNaughton Canada’s Outtrim. “Foreign money will continue to chase these and will be forcing a more competitive response from large North American buyers.”

Specific to Syncrude, he says, “The U.S. debt financing world is going to have to help out to make it possible to keep these mature…operations within western corporate ownership.”

8. The economy and the price of oil: up, up, and slowly away

It would seem that economic recovery is slowly taking hold, and the price of oil is expected to settle into a relatively nice spread of between $75 and $80 per barrel throughout 2010. That’s a benefit for the oilsands industry, but natural gas producers and suppliers are not so lucky.

“Alberta gas is drowning in the oversupply and unfortunately will likely stay in the range of $5–6 per gigajoule,” says Outtrim.

As for the recession—well, CERI’s McColl says it really wasn’t that big of a deal to start with.

“There has been a lot of doom and gloom about the recession,” he says. “That’s a generational issue. It was overly spun as a horrific thing when really it was just a small recession.”

9. On the job front: outlook not that good but not that bad

Before the price of oil tanked and the recession hit, 2010 was predicted to be beyond bustling in the oilsands sector. While that is clearly not going to be the reality, it is perhaps not all for the worst.

“Two years ago, 2010 was going to be an absolutely impossible year to get through. It was going to be the peak of all peaks, but that’s not going to materialize,” says Brad Anderson, executive director of both the Alberta Chamber of Resources and the Construction Owners Association of Alberta. He says, however, that projects are still happening across the province, with the oilsands industry a bright spot. “It’s not like what we thought it was going to be, but it’s not going to be as bad as we thought last year…2010 will at best be a neutral year.”

Anderson says that the downturn has resulted in a lower number of students going into the trades, which could be a setback in the future.

“We’re seeing the number of kids going into first-year apprenticeship drop. That’s a concern because [heavy industrial construction] will come back.”

10. Tailings breakthrough: Suncor to complete first pond reclamation

In 2010, oilsand pioneer Suncor Energy plans to “rapidly accelerate” the implementation of a new tailings management technology that could drastically reduce the time it takes to make the waste substance trafficable and ready for reclamation—from decades to weeks. This as it expects to officially complete the reclamation of its first tailings pond to a trafficable surface.

“It’s fitting that in the same year we reach an important reclamation milestone, we expect to implement improved technology to increase the pace of reclamation,” says Kirk Bailey, Suncor’s executive vice-president, oilsands.

Pembina called the new technology an important first step in acknowledging the tailings issue and approaching it with a new technique.