The Impossible Dream That Is Canadian Oil Sands


When it comes to the Canadian oil sands, we’ll paraphrase Daniel Plainview from There Will Be Blood: There is an ocean of oil beneath Candian feet, it’s just going to be very difficult to get out of the ground.

FBR Research visited 13 public and private oil sands development companies. The result of their work is a grim report that shows limited growth in the production of oil from Canadian oil sands and slashed capital spending.

Previous estimates thought that there would be 4 million barrels of oil being pulled from the sands by 2015, FBR only sees 2 million a day. That’s puny, especially when you consider that they currently pull 1.3 million barrels a day. Capital spending (chart below) will be more than halved in 2009 compared to 2008 and it won’t hit 2007 levels any time soon.


Here are some of the risks FBR sees within the industry:

  • Commodity risk: if the price of oil keeps falling, oil sands companies stand no chance. Oil must be at $85 a barrel (and costs need to drop) for companies to get to break even.
  • Oil sands: Companies need a to upgrade their operations, and watch their budgets. They also need to integrate their strategies so they are both mining and upgrading, which means refining the oil while it’s still in the ground (explanation.)
  • Cost risks: Cost overruns could occur, and government policy to limit emissions could negatively affect cash, earnings and valuations.
  • Currency exchange: Canadian companies pay expenses in Canadian dollars, but collect revenue in US dollars. A strengthening of the Canadian dollar to the U.S. dollar could have a negative impact on a company’s earnings and valuation.

Here’s their specific company takeaways:

For Canadian Natural Resources Ltd. (CNQ), the startup issues at Horizon are known and investors are already discounting the 80–89 Mbbl/d 2009 Horizon guidance, but we believe that cash flow from the project could still disappoint given the high fixed-cost nature, which we estimate requires 40–50 Mbbl/d to breakeven. We also expect additional conventional capex cuts, in turn hurting 2010 volumes, which are already declining entry to exit in 2009. For Suncor Energy Inc. (SU), we expect positive operational improvements in 2H09, including better visibility on production growth and potentially lower operating costs. For Petro-Canada (PCZ), we believe that there is a good chance the lease will be extended in mid 2009, given the industry-wide drop in investment activity, which has gotten the attention of the government. EnCana Corp. (ECA) is continuing to work to further improve its already best-in-class SAGD performance with wedge wells, Solvent Aided Process (SAP) 4D seismic, lower pressure techniques, along with other approaches. The Wood River expansion is on time and on budget, but the real test will come as we get closer to completion date, which is when the real cost overruns start to materialise. For Nexen Inc. (NXY), steam capacity seems to be the reason why well production is lagging expectations, but individual well performance is up to expectations. Steam-oil ratios (SORs) are at four currently and are still expected to decrease to three or below as full production is achieved.