The Canadian Oil Sands: Reaching a Saturation Point

Encouraged by high oil prices, a large, long-life reserves base, a favorable investment climate, and an increasingly limited global upstream opportunity set, the past several years have seen a number of Global IOCs and internationalizing NOCs taking larger stakes in the Canadian oil sands. Though Large Independents (including Suncor, Petro-Canada, Nexen, EnCana, Husky, Murphy, and Devon) and US-based Global Players (such as ExxonMobil, via its interests in Imperial Oil) continue to maintain a strong presence in the region, a flurry of acquisitions and upstream-downstream joint venture agreements have brought a number of new players (such as TOTAL) into the region, and have seen legacy asset holders (such as ConocoPhillips and Shell) bolster their exposure to the oil sands play.

Despite growing interest, however, the oil sands play continues to face significant obstacles to development. Current project expansion plans, for example, are severely constrained by the availability of labor, materials, water, gas, and current technologies; as a result, project costs are spiraling upwards. At the same time, increasing concerns about the unstructured nature of the industry’s development, as well as the environmental impact of oil sands projects, make new government regulations increasingly likely. As the industry moves to work through these issues, consolidation, technological innovation, and public relations acumen are likely to be key differentiators in the upstream competitive environment.

Cumulatively, the effect of large production expectations and the growing impact of escalating costs and infrastructure scarcity issues suggests that the Canadian oil sands industry has in many respects reached a saturation point, in that the huge potential is increasingly constrained by the environment’s ability to support it. This emerging crossroads has implications in terms of both project timetables and upstream strategy and competition.

Upstream strategy: As costs spiral upwards and schedule control becomes a top priority, a move towards greater consolidation around larger players - whose strong balance sheets, project management experience, and integrated portfolios provide greater ability to stay the course amidst growing constraints - may be a natural progression for the industry. At the same time, companies that are able to develop solutions to any one of the industry’s larger technical problems, such as water re-use and CO2 capture, will capture significant competitive benefits. And finally, though it is still too early to measure, the fallout on the environmental side from oil sands exploitation is likely to have a considerable impact on the competitive environment in years to come. While the size of the oil sands prize more or less ensures sustained interest on the part of the Majors, the PR wildcard may ultimately force some longer-term re-evaluations of oil sands positioning.

Key Conclusions:

A flurry of interest in Canadian oil sands is putting pressure on labor, gas and water, and service providers, with schedule and cost implications.

While current projects may not suffer so much, future projects will need to be, and are being, re-evaluated.

Serious environmental consequences of oil sands development, not least the issue of CO2, may trigger government intervention or a PR backlash for leading operators.

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Rebecca Fitz is a Lead Analyst in the Upstream Group, which covers strategic, competition and portfolio analysis in all aspects of the sector. For further information on this article contact Enews_rfitz@pfcenergy.com.