As the Canadian oil-sands hub of Fort McMurray, Alberta, battles
to rebuild after wildfires that ripped through in May, the industry
that made it a boomtown is contemplating the end of an era of rapid
growth.
The wildfires, which roiled global crude markets by temporarily
shutting off production of at least a million barrels of oil a day,
added to the mounting woes of Canada's oil-sands producers. High
costs, tighter regulations, and tougher competition from shale oil
have turned the industry into one of the biggest casualties of a
two-year-old swoon in oil prices.
"A lot of plans that were based on triple-digit oil prices in
the $100s [per barrel] are having to be adjusted in this
environment," said Murray Edwards, chairman of Canadian Natural
Resources Ltd. "All of us are having to look at our models" to
assess what makes sense at $50 a barrel, he said in an interview,
adding that only the best projects will get built.
In a weak energy market, caution about spending has cast a pall
over costly oil and gas projects around the world, such as Arctic
drilling and deepwater wells. Canada's oil sands face even stiffer
headwinds because they are one of the world's toughest to extract
and most greenhouse-gas-intensive sources of crude.
Shale oil, meanwhile, has become much cheaper to produce and
offers a faster payback on investment, thanks to technological
advances such as hydraulic fracturing and horizontal well
drilling.
Canadian Natural is building what might be one of the industry's
last megaprojects: a 22.2 billion Canadian dollar (US$17 billion)
strip mine called Horizon, on which it broke ground on more than a
decade ago. The final phase will start up next year, boosting
output to 250,000 barrels of crude a day. But that is just half the
500,000-barrel-a-day capacity originally envisioned for the
mine.
Nearly two dozen oil-sands projects have been canceled or
suspended. European multinationals have been among the quickest to
reassess their exposure, including Royal Dutch Shell PLC, Statoil
ASA of Norway and Total SA of France.
Last year, Total pulled the plug on a planned C$11 billion
project, and it said in May that the move showcased its commitment
to lower-cost, more environmentally sustainable development. "We
decided to reduce our exposure in Canada's oil sands, which are
particularly expensive to develop and operate," the company said in
a report. The report added that to meet climate-change goals, "part
of the world's fossil-fuel resources cannot be developed."
Such pullbacks haven't been good for Fort McMurray, which is
home to many oil-sands workers and depends heavily on the industry.
For nearly a decade it prospered as oil companies invested billions
of dollars in the forests of northern Alberta, more than doubling
the province's oil-sand output and contributing to a global glut
that has depressed crude prices. The town, like the industry, was
already feeling the pinch when the wildfires roared in May.
The Insurance Bureau of Canada estimated last week that
rebuilding the town will cost $2.8 billion. Even then, business
isn't likely to be booming anytime soon.
"The period of megaprojects and robust industry growth is behind
us," Mark Ward, chief executive of Syncrude Canada Ltd., Canada's
largest oil-sands producer, told the Fort McMurray Chamber of
Commerce in April.
Mr. Ward's speech came just days before fire evacuations forced
Syncrude, a unit of Suncor Energy Inc., to temporarily shut down
two of its oil-sands mines.
Once a trio of new mines and a handful of smaller well sites
reach full capacity over the next two to three years, oil-sands
growth is expected to grind almost to a halt, based on publicly
announced plans by producers.
The Canadian Association of Petroleum Producers recently cut its
annual growth projection for a third year in a row after surveying
its members, forecasting oil-sands output of 3.7 million barrels a
day by 2030, up from current output of about 2.4 million. As
recently as 2013, the group had forecast oil- sands production of
5.2 million barrels a day by then.
Exxon Mobil Corp. says it remains committed to oil-sands
investments, but that future projects will have to compete for
capital with its other businesses, which include shale-oil producer
XTO Energy.
The company's Canadian unit completed construction last year on
the second phase of Kearl, a giant oil-sands mine, after the first
phase was plagued by cost overruns and delays. All told, the
220,000-barrel-a-day project took six years and cost C$22 billion,
split between Exxon and local subsidiary Imperial Oil Ltd.
Four years ago, Imperial informed investors it was "on target"
to reach maximum capacity at Kearl of as much as 345,000 barrels a
day and start up a separate 80,000-barrel-a-day oil-sands project
called Aspen by the turn of the decade.
Imperial CEO Rich Kruger who has expressed misgivings about an
Alberta government plan to impose an industry-wide cap on oil-sands
greenhouse-gas emissions, said that a third expansion phase at
Kearl is off the table for now, and that a decision won't be made
until next year at the earliest on Aspen. "Certainly the price
environment will alter the views on the economic attractiveness" of
any new oil sands investments, he told reporters in April.
Write to Chester Dawson at chester.dawson@wsj.com
(END) Dow Jones Newswires
July 10, 2016 21:45 ET (01:45 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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