Filed Under: ,
Tickers in this Article: DVN, IMO, XOM, COP, STO, SU, NXY, CLL, OPC, RDS.A, RDS.B
The fall in oil prices is causing cancellation of many new Canadian oil sands projects and expansion plans. Moreover, it is crushing the dreams of those who thought increased production would reduce our dependence on volatile and politically unstable import sources. The oil reserves in the Canadian oil sands are estimated at 175 billion barrels of recoverable reserves.

IN PICTURES: Learn To Invest In 10 Steps

To A Screeching Halt
The list of canceled projects - the result of lower absolute oil prices and expanded heavy oil differentials - is large and growing. A differential refers to the lower price that companies receive for oil from the sands due to its lower quality relative to other grades. This discount has widened, possibly to a level that makes implementation of new projects uneconomic.

Suncor Energy (NYSE:SU), which produced 278,000 barrels of oil per day out of the oil sands in March 2009, announced that it would delay expansion of its Voyageur project. This expansion was part of the company's goal to increase production to 550,000 barrels per day.

StatoilHydro (NYSE:STO) decided late last year to shelve its plan to construct a bitumen upgrader in Alberta. The upgrade already had been postponed until 2016.

Connacher Oil and Gas (TSX:CLL), a small cap company in Canada, suspended production of its Alger project. Alger was a steam-assisted gravity drainage (SAGD) project designed to provide 10,000 barrels per day of capacity when complete. The company already had spent $110 million of the $345 million cost of the project.

Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B) delayed two projects in the oil sands - a new project at Carmon Creek and the expansion of its existing facility at Athabasca.

Nexen (NYSE:NXY) and Opti Canada (TSX:OPC), joint developers of a project at Long Lake in Alberta, have put a hold on their endeavor. In February 2009, the companies received final regulatory approval for Phase II of the project which, when complete, would have added another 70,000 barrels per day of production. (Learn more about this sector in The Industry Handbook: The Oil Services Industry.)

Single Green Light...
Not all companies are cutting back on projects, though. Devon Energy (NYSE:DVN) is developing a two-phase project in the Canadian oil sands, called Jackfish. Production from Phase I reached 22,000 barrels per day in the fourth quarter of 2008 and will be ramped up to 35,000 barrels per day in 2009. Phase II of Jackfish is planned to start up in 2011.

But The Time Is Now!
There are a number of problems I have with these cut backs. For years, we've heard large oil companies talk incessantly about how they plan projects using a lower average price of oil, ignoring short-term fluctuations in price. Now that we have reached a collapse in oil prices, it's hard to believe that these companies used a long-term price above the $50 per share, where oil closely trades at present.

The decline in costs to construct new projects also must be factored into the equation. Prices for cement, steel, natural gas and labor - all significant costs for the industry - have fallen precipitously during the recession, which lead to lower breakeven costs for new projects. Energy companies must start projects now due to the long lead time, which would allow production to come on line when oil prices rise again. (Read more about placing your money in this slippery resource at A Guide To Investing In Oil Markets.)

It's not as if the oil sands will go away. Major oil companies produce from the sands and will continue to do so provided that cash operating costs exceed the current realized oil price. ConocoPhillips (NYSE:COP) currently produces at a rate of 60,000 barrels per day. Even after major capital expenditure cutbacks, the company estimates that production will reach 90,000 barrels of equivalent per day by the end of 2009, including 28,000 barrels per day of Syncrude production.

Imperial Oil (NYSE:IMO), a large Canadian energy company, produces just over 200,000 barrels per day from its sands properties in Alberta. Exxon Mobil (NYSE:XOM) owns 69.6% of the outstanding Imperial Oil stock.



Bottom Line
The collapse in oil prices is dashing the hopes of those Americans who were looking north of the border for a more politically stable source of imported oil. It appears that this dream has been postponed. (Before jumping into this hot sector, learn how these companies make their money in Oil And Gas Industry Primer.)

comments powered by Disqus

Trading Center