Inflation not worrying the reviving Canada oil sands

A revival of interest in Canada’s oil sands has yet to spark worries of a return to the overheated development of the sands that fuelled painful cost overruns and construction delays before the recession. In fact, a little inflation would be good for the northern Alberta region’s oil and gas industry, which saw C$90 billion (Dh310bn) worth of projects shelved as crude prices tumbled in the downturn of 2008 and 2009, one industry official said.

Several big-name companies said last week they plan to move forward with projects in the oil sands, the biggest crude oil reserve outside the Middle East, where the construction sector is now operating well under capacity.

“In terms of inflation, my view is the economy could use a little growth. It’s a positive thing,” said Don Thompson, President of the Oil Sands Developers Group, an association that deals with industry issues. “And I would expect that the rate of growth would not be as rapid as we previously saw, and so I think that inflationary concerns are not an issue right now.”

It was a busy week. On Tuesday, ConocoPhillips  and Total said they will proceed with the second phase of their Surmont project, which will quadruple output to 110,000 barrels a day.

The following day, Husky Energy and BP said they were near ready to proceed with their C$2.5bn Sunrise project after taking the past year to find ways to work down the costs.

Last week, Canadian Natural Resources said it aims to sanction the expansion of its Horizon oil project and construction of its Kirby development by year-end.

In 2008, as oil tumbled from a peak of about C$147 a barrel and credit markets froze, numerous companies put development plans on hold so they could rework projects to cut costs.

Before the autumn of 2008, analysts said integrated projects required oil prices of $80 to $100 a barrel to proceed. Such projects typically included an open pit mine, a plant to extract the tar-like bitumen, and an upgrader to turn it into refinery-ready crude.

The major reasons for the high cost were the stretched labor pool in Alberta and inflation in prices for steel and other materials.

Oil prices are now in the $75 a barrel range, and oil sands development costs may have fallen roughly 20 per cent, depending on the project, FirstEnergy Capital analyst Michael Dunn said.

Indeed, Husky and BP chopped C$1.5bn from their previous cost estimate for Sunrise. “2009 was definitely a low point for activity. That being said, a lot of these project announcements have been in the timelines and plans for these companies,” Dunn said.

“And the announcements we’ve heard about are ‘in situ’ steam-assisted gravity drainage developments, which are generally not as labor-intensive as mining operations.”

With such projects, companies inject steam into the ground, liquefying the extra-heavy crude so it can be pumped to the surface in wells. Canadian Natural Vice-Chairman John Langille told investors last week that even during the boom his company was able to boost output from in situ projects at a relatively cheap C$20,000 per barrel of production. That was about a quarter of the cost of some integrated mining developments.

“Overall with the in situ it is easier to control the costs,” he said. “I don’t think having three or four projects going at the same time will drive those costs to where they don’t make any sense to proceed.”

During the oil sands rush, thousands of workers from other parts of Canada and around the world came to Alberta to fortify the labor pool.

 

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