Capital and operating costs may be down in the oilsands, but don’t expect investors to start running back to Alberta any time soon, says Matthew Foss, chief energy economist with the Government of Alberta.
The resources are “exciting,” but big changes are required to improve competitiveness, Foss told the 2016 World Heavy Oil Congress on Wednesday.
“Unfortunately, Alberta stacks up kind of middle of the road. We’ve got great resource potential and opportunities but we remain a jurisdiction that is reasonably high cost [and] suffers from all of the inflation pressures that we experience,” Foss said.
“The combination of that and being far distance from market leaves us challenged to compete and perhaps not the first destination for the incremental dollar of investment.”
Foss warned that Canada could face a similar dramatic reduction in oil development in the future as it is currently experiencing with natural gas.
“A decade ago you looked out and you said, ‘As much natural gas as we can produce or want to produce, we’re going to find a market for.’ The development of shale in the US has changed that picture so dramatically that we’re fighting for a lot of the traditional markets that we used to have, and the prospects for growth are looking a lot more tenuous,” he said.
“We have to be careful we don’t turn our oil industry into that same story. If we don’t continue to push out to new markets and continue to be aggressive in defending our markets, we’re going to suffer.”
Cost reductions bottoming out
The good news is that the government estimates that breakeven thresholds for oilsands projects are about $10/bbl lower today than they were two years ago. The not-so-good news is that the potential for reductions has a floor.
“The numbers that we routinely collect in the Alberta government suggest that on average the cost to construct new facilities has fallen 8 to 10 percent compared to 2014, whereas the weighted average operating costs for mines has fallen by 25 percent and the thermal in situ projects have fallen nearly 40 percent,” Foss said.
“We’re seeing projects that we thought were $60-$70 breakevens falling back into the $50-$60 breakeven range, and hopefully most of that is permanent.”
However, Foss said that costs probably don’t have much more room to fall.
“Although costs have declined, they are expected to bottom out this year, leaving project economics challenged as prices stay and linger slightly below $50/bbl right now.”
The new oilsands decade
Despite the challenges facing the industry, Foss said the long-term fundamentals are encouraging.
“The simple fact is renewables just are not going to be enough to meet energy needs of the globe for the next generation, and so we’ll need more hydrocarbons produced. There are only a limited number of places in the world that you can go and develop projects and expand, and so clearly we believe that western Canada is on solid footing with respect to that,” he said.
“Having said that though, the next decade is going to be a lot different than the last decade. The challenges we’re facing are not of unprecedented growth and expansion. The oilsands industry, heavy oil industry here in western Canada is going to have to be a lot more innovative, a lot more careful with how it advances projects.
"It’s going to have to do things that have much shorter cycle times and perhaps even become a lot more bite-sized than the major projects that have been the hallmark of the oilsands industry thus far.
“[There are] big changes coming, but certainly the opportunity that exists here in western Canada is exciting. Some major pieces, like new infrastructure, [are] going to have to be a hallmark of being successful.”