Commentary | The ups and downs of oil

How the credit crisis has impacted the tar sands

Over the last two years, the Canadian oil sands have been hit hard by the financial crisis and collapse of global oil prices. Massive layoffs, budget and dividend cuts, and disappearing profits have plagued the industry, with major players including Suncor (now merged with Petro-Canada) and Syncrude downsizing their budgets by almost 35 per cent. Balance sheet preservation has been a top priority across the sector. Subsequently, the Canadian Energy Research Institute (CERI) reported that $200 billion of planned investments have been deferred, delayed, or cancelled altogether.

How quickly will the oil heaven recover? The outcome largely depends on the oil prices and access to inexpensive capital. With the worst of the turmoil passed, various analysts predicted a multiple-year recovery phase. CERI forecasted a stall in any growth of the oil sands developmnt until 2013, with no major growth until 2015.

Yet against all odds, the sector has demonstrated surprisingly tremendous resilience. In the last five months, development has picked up again. The $900-million resumption of the Firebag 3 in situ project has received the green light from the bigwigs at Syncrude. ConocoPhillips and Total Canada have decided to undertake the multi-billion expansion of Surmount project, followed in short order by the $2.5-billion Sunrise in situ joint venture by Husky Energy and British Petroleum. This sudden surge is primarily a result of the recovery of oil prices to the $75-80 per barrel mark.

However, the new projects pale in significance compared to the capital might of the projects being undertaken at the helm of the pre-recession oil boom. At the moment, companies seem hesitant to commit upfront to mega projects like the $20.6-billion Voyager Upgrader by Suncor Energy.

The credit crisis has been singled out as the reason behind Alberta’s oil bubble bursting. However, a closer analysis would bring to your attention the rapid pace of development, which was to the detriment of the very sector. The collapse proved correct the fears of a small minority, including but not limited to former Alberta premier Peter Lougheed, who actively supported an artificial slow down of the development to allow time for proper infrastructure and workforce planning. The unending chain of projects being undertaken before the bust had made labour and raw material costs plummet.

In some years from now, major oil companies may consider the financial crunch to be a blessing in disguise for the oil sands. It has provided them with an opportunity to re-evaluate their expansion strategies, as witnessed by ConocoPhillips’ president Matt Fox’s recent confession that he plans to implement the Surmount expansion in multiple stages – an approach that is less likely to strain the resources at the disposal of his company and industry in general.

In the post-credit crisis era, oil sands face multi-faceted challenges with a minimal margin for error. Projects are under heavy scrutiny by environmental watchdogs and government agencies like Alberta’s Energy Resources and Conservation Board. Investors are increasingly aware of the financial and social risks associated with the oil sands, the extent of which is evident from investors’ recent uproar over Shell and British Petroleum, causing both companies to seriously reconsider investments in the Canadian oil sands. Subsequently, Shell has rolled back new projects, whereas British Petroleum is under stern pressure to concede as well.

To add to the misery, the U.S. government has been considering a carbon tax for some time. One has to take into account that the United States is the prime importer of Canadian crude and any attempts to model carbon legislation on the Californian model would be a blatant discrimination against the Canadian oil sands. Similarly, a carbon tax legislation targeting oil sands was recently brought forward by the European Union. However, with the prospect of souring trade relations with Canada, the discriminatory scheme was shelved for the time being. Industry leaders like Clive Mather (former Shell CEO) believe the industry has collectively failed to deliver on the environmental front and has called for enhanced engagement with environmental organizations to improve the situation.

Yet all is not gloom and doom for the industry. ConocoPhillips plans to use saline water at the Surmount expansion and, with the help of an evaporator, hopes to reduce the amount of water channeled from the resource. Additionally, it plans to invest $300 million in heavy oil research to optimize economic and environmental performance.

I would like to reiterate that industries tend to go through ups and downs. Geopolitical and market considerations aside, it is the vision of the leaders at the helm that define the stability and long term success of companies. Greed is intrinsic human nature, but I hope the bigwigs on Alberta’s oil patch will act with caution and prudence this time around, as the bread and butter of many depend on their decisions!

Wahaj Aslam is an engineering student who is currently interning with Nexen Inc. on the Long Lake oil sands project. Write Wahaj at wahaj.aslam@mail.mcgill.ca.


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