Oil sands companies are becoming more confident about spending cash to significantly boost their production, driven by positive policy signals and plans for new and expanded pipelines, analysts say.
That includes an agreement signed July 2 by Alberta, Ottawa and the five largest oil sands companies in the country to push forward a massive carbon capture project in the province’s north, called Pathways. The non-binding deal cleared away another hurdle to the construction of a proposed new West Coast oil pipeline, and opened the door to Ottawa and Alberta providing more financial support to oil sands producers to cut their emissions and expand production.
Pipeline capacity – or rather, the lack of it – has long been a point of contention for oil companies and Alberta. That is slowly changing. Enbridge and Trans Mountain are working to increase capacity on their lines, South Bow Corp. is pursuing the Prairie Connector pipeline from Alberta to Montana, and the province has also proposed a new West Coast oil pipeline.
The Alberta oil sector’s confidence in growing production is driven by the belief that at least some of those pipelines will materialize in a reasonable timeframe, said Menno Hulshof, a managing director and senior research analyst covering the Canadian energy sector at TD Cowen.
“We went from TMX coming online and questioning whether that was going to be the last of it, to quickly realizing that is absolutely not the case,” Mr. Hulshof said in an interview Tuesday.
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Even if all of the projects don’t materialize, he said, the sector suddenly has a lot of different options that didn’t exist a couple of years ago. That puts oil sands companies in “a pretty good place” in terms of how expensive eventual tolls on the lines might be.
Ultimately, it also drives their interest in pursuing low-cost projects to boost efficiency and production, he said.
Every oil sands company that Mr. Hulshof covers has a list of such projects, which would overhaul the slowest or most inefficient steps in their production systems, known as debottlenecking. These projects can typically be completed in a reasonable timeframe and generate significant returns, he said, particularly in a world of US$65 to US$70 oil, where the market sits today.
Mr. Hulshof said the memorandum of understanding signed by governments and oil companies in November, which tied the construction of a new oil pipeline from Alberta to the West Coast to lowering emissions through the Pathways carbon capture project, is positive for industry. In particular, he pointed to the MOU’s inclusion of a Nov. 15 deadline for the release of final government policy details on boosting production.
A Scotiabank Global Equity Research analysis of the MOU, released Tuesday, took a similar view, calling it “another positive step toward an improved regulatory environment for Canadian oil sands producers.”
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Alberta Premier Danielle Smith has long said she wants to see oil production grow to eight million barrels per day by 2035.
While Western Canada’s geology and reserves can support that kind of growth trajectory, “economic and political factors still need further compromise and cooperation if a green light on the oil side is to be achieved,” the Scotiabank note said.
Still, it added, between the agreement and recent geopolitical events, such as the war in Iran, “the potential for renewed growth in Canada’s oil and gas industry is high.”
What’s unlikely, however, is a repeat of the boom of megaprojects that the oil sands saw in the mid-2000s, when massive mining projects such as Horizon and Kearl began construction, Mr. Hulshof said.
He put the sector’s reluctance to pursue that scale of expansion partly down to its memory of being burned by cost overruns and delays.
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Plus, rather than the past focus on mining projects, Mr. Hulshof said industry and investors today are looking instead to expand less-costly thermal production, in which steam is injected underground to heat heavy bitumen so it can be pumped to the surface.
Companies are also more focused on maintaining healthy balance sheets than they once were.
“The feedback that I get from a lot of investors is, ‘I’m okay with some growth, but let’s not get too crazy with it, and let’s certainly not do it at the expense of the shareholder return framework that a lot of these companies are are still committed to,’ ” he said.
“I’m not too concerned about a big loss in in capital discipline. I think the scar tissue that developed over the last 15 years is still there.”
While oil sands producers could add upwards of 1.5 million to two million barrels a day to production fairly easily, Mr. Hulshof said, he doesn’t see the sector heading down the road to a world where the oil sands is completely unleashed.
“I think it’s too soon to use that term,” he said.
“I think it’s going to be more measured and thoughtful than that.”