In the back half of 2008, activity in the Athabasca oil sands pretty much ground to a halt, with companies like Suncor (NYSE: SU) slamming the brakes on their multibillion-dollar projects. This trend continued in the early part of 2009, with Total (NYSE:TOT) dragging its feet on Joslyn and Enerplus Resources Fund (NYSE: ERF) deferring development of a relatively modest-sized in-situ project.
As the fog of the credit crisis abated, I perceived three signs of life in the oil sands later in the year:
- Imperial Oil's (NYSEMKT:IMO) steps to advance both its Kearl and Cold Lake projects.
- PetroChina's (NYSE: PTR) major joint venture (recently OK'd by the government).
- Cenovus Energy's (NYSE: CVE) forward march at Narrows Lake.
Oil sands fans will be happy to know that two more major projects got the green light last week.
First, ConocoPhillips (NYSE: COP) announced that it's moving ahead with phase 2 of its Surmont project with partner Total. This expansion will ratchet Surmont's present production of 20,000 barrels per day to 110,000 barrels per day in 2015. A cost figure wasn't provided, but keep reading and you'll be able to ballpark one.
Back in October, Total Canada's new CEO said he'd need to see oil in the $80 to $85 per barrel range before moving ahead with Joslyn. Why the readiness to fire up Surmont, then? As discussed in my look at Cenovus' Narrows Lake project (see link above), it comes down to the economics of open pit mining versus in-situ recovery. Surmont employs the latter extraction technique.
Same goes for the Sunrise project, part of the poetic partnership between Husky Energy (OTCQB:HUSKF) and BP (NYSE: BP). The firms announced last Wednesday that they're ready to spend $2.4 billion on the first phase of the project, which should produce 60,000 barrels per day. That's roughly half the per-flowing-barrel installed cost of Canadian Natural Resources' (NYSE: CNQ) Horizon mining project -- exactly the target I laid out for Cenovus at Narrows Lake.
Husky cited a whopping 40% drop from its prior cost projection. Given the current industry cost structure, expect more and more in-situ projects to press forward. One thing to remember is that just because the numbers now work on paper, that doesn't mean these projects will all produce or pay out as planned. See Husky's Tucker Lake for an example of what can go wrong.
Disclosure: Author doesn't have a position in any company mentioned.