Oil sands, oil supply

Aug. 28, 2017
Anyone hoping for a return to normalcy in the oil market, to the security of cyclicality, to the assurance that low prices must rise again, should remember two words: oil sands.

Anyone hoping for a return to normalcy in the oil market, to the security of cyclicality, to the assurance that low prices must rise again, should remember two words: oil sands. Investors are reported to be newly worried that tight-oil plays in the Permian basin are turning gassy, that potential there might not match the promise, that-well, who knows what the next worry will be?

In fact, much about spectacular horizontal-drilling plays of North America remains in question. How much further can technical innovation and the squeezing of contractors lower cost? How extensive are the sweet spots? How will the independent producers who pioneered these world-changing developments persist if investors panic?

Uncharted territory

Good questions, all. In the world of unconventional resources, the oil and gas business finds itself in unchartered territory in which most supply surprises, so far, have been on the high side. But important questions about newly accessible light oil in low-permeability reservoirs shouldn't blind anyone to the potential of that other unconventional resource.

The Canadian oil sands industry, centered in Alberta, has suffered a rough few years. Capital investment, according to the Canadian Association of Petroleum Producers, has fallen to an expected $15 billion (Can.) this year from $34 billion in 2014. Several international oil companies-Shell, ConocoPhillips, Marathon, Statoil-have withdrawn. The provincial and federal governments have become much less supportive of oil sands development than they were a couple of elections ago.

But the Canadianizing industry hasn't stagnated. It is responding as industries do to price-induced distress: innovating to cut cost. In Alberta, oil-sands producers have extra incentive. The provincial government has set a cap on greenhouse-gas emissions that's likely to begin constraining operations about 2028. Because emissions correspond to the high energy requirements of oil sands production, operators have strong compulsion to cut the energy intensity of their work.

The Canadian Energy Research Institute estimates that field-gate costs for stand-alone oil-sands mines have fallen by 6% since 2015 and for steam-assisted gravity drainage (SAGD) projects by 27%. Most future production in the oil sands will come from SAGD and other in situ methods.

Costs of production from oil-sands projects of all types remain high. After adjustment for blending and transportation, CERI's estimate of the West Texas Intermediate-equivalent supply cost for output from a hypothetical SAGD project at Cushing, Okla., is $60.52/bbl. For a stand-alone mine, it's $75.73/bbl. Still, the WTI-equivalent cost for a greenfield project is 25% lower than it was a year ago. For a stand-alone mine, it's 16% lower.

Cost reduction will continue. In thermal projects, operators are injecting solvents with steam to improve recovery, reduce steam-oil ratios and energy inputs, and lower viscosities of produced bitumen. New tools for gathering and analyzing data help them optimize steam-solvent mixtures and manage injection rates. Similar tools improve efficiencies and lower costs of oil sands mines.

Although activity has slowed, especially for greenfield projects, oil-sands production keeps rising. Operators continue to bring new phases on stream at existing projects. Compared with other types of oil production, depletion rates are low.

In June, CAPP forecast an increase in oil-sands production to 3.67 million b/d in 2030 from 2.4 million b/d last year. The 2030 projection includes 2.16 million b/d from in situ projects and 1.51 million b/d from mines. CAPP's outlook aligns roughly with a low-case forecast CERI made in February. CERI sees oil-sands production in 2030 under reference-case assumptions of 4.8 million b/d and in a high case-assuming a favorable balance of investment conditions, cost reduction, and oil prices-of 5.9 million b/d.

Supply and ingenuity

Output from the Canadian oil sands is and will remain a strong force in the market-important as much for potential as for immediate supply. As with tight-oil plays, production growth comes from technical rather than geological discovery.

With unconventional resources, oil supply relates increasingly to human ingenuity, the limits to which are nowhere in sight.