Leaders of the country’s largest oil companies spent the past few months playing hardball with the federal and Alberta governments over carbon taxes.
On Monday, we learned those aggressive tactics resulted in a win for the five companies that make up the Oil Sands Alliance.
In return for lowering emissions by funding the Pathways carbon capture and storage project, and dramatically ramping up oil production, the government gave a break on future carbon-tax increases to Canadian Natural Resources Ltd., Cenovus Energy Inc., Suncor Energy Inc., Imperial Oil Ltd. and ConocoPhillips Co.
Ottawa and Alberta now expect oil sands producers make Canada an energy export superpower. Long-dormant development muscles are about to get a workout.
For the first time in more than a decade, the onus is on oil patch CEOs to develop their massive Alberta holdings and send more bitumen to global customers, through a new $35-billion-plus pipeline that seems likely to be paid for by taxpayers.
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The oil patch pressure campaign that led to Monday’s announcement included a decision in March by Canadian Natural to hit pause on a planned $8.25-billion expansion of the Jackpine project in northern Alberta.
Canadian Natural’s managers, who are led by normally low-profile executive chairman Murray Edwards, went public with a message that they downed tools at Jackpine over the lack of certainty around carbon taxes.
In May, Cenovus chief executive officer Jon McKenzie called out Ottawa’s “myopic dialogue” on climate policy, rather than investment in energy, as the reason no greenfield oil sands projects have been approved or built since 2013.
Heads of the five major oil sands producers hold a conference call every Friday morning to co-ordinate strategy and tactics. No one skips this session. When Canadian Natural and Cenovus sounded off, they did so with the support of peers.
Going forward, those Friday gatherings will feature discussions on developing properties, rather than lobbying politicians.
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For the past decade, oil sands CEOs put more emphasis on financial engineering than they did on engineering new projects. In the absence of major developments, companies aggressively paid down debt, boosted dividends and bought back stock. They used acquisitions to boost oil reserves.
The mindset needs to change. To fulfill their end of the grand bargain, oil sands operators are going to need to expand production at twice the pace seen over the past decade, when output increased to two million barrels a day from 1.4 million.
Increasing production by one million barrels is expected to cost the industry about $100-billion. Hiring the required skilled workers and buying equipment will be daunting tasks.
The challenge in the oil sands is logistics, not exploring for new reserves. Every oil sands producer holds leases on undeveloped but fully surveyed properties.
To give a sense of the supply challenge, the proposed 1,250-kilometre pipeline to the Roberts Bank export terminal near Vancouver will carry a million barrels of oil a day. If Canadian Natural started work on upgrading Jackpine tomorrow, the $8.25-billion project will only increase bitumen output by 150,000 barrels a day when it is completed in six years.
Imperial Oil, controlled by Houston-based Exxon Mobil Corp., could restart its 150,000 barrel-a-day Aspen project after deferring development seven years ago. In analyst calls, Imperial has also highlighted the potential for eventually producing 150,000 barrels of bitumen a day from its Clark Creek and Corner oil sands properties.
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If Imperial does break new ground, it will do so with technology that reduces its environmental footprint. Two years ago, Imperial began field trials on extraction systems that uses less steam and more chemical solvent to separate bitumen from sand. The project, done in partnership with Cenovus, promises to lower emissions on developments such as Aspen.
ConoccoPhillips, also headquartered in Houston, has four potential oil sands properties waiting for a green light.
Calgary-based Suncor’s contributions to filling the new pipeline could include the planned development of the Lewis property, forecast to produce 160,000 barrels a day, and a 225,000-barrel expansion of its base mine near Fort McMurray, Alta.
Since the July 2 announcement of a potential new pipeline, smaller oil sands companies have also revealed plans to boost production.
On Monday, Greenfire Resources Ltd. paid $1.28-billion for privately owned Connacher Oil and Gas Ltd. Greenfire, controlled by entrepreneur Adam Waterous, is targeting 65,000 barrels a day of bitumen production.
For the largest players in the oil patch, years of complaining about government came to an end this month. The agreement with Alberta and Ottawa gave the industry some of the carbon-tax relief it demanded, along with a manageable framework for building the Pathways project.
The flip side of this agreement is an obligation for oil sands companies to ramp up production as they never have before. Politicians and investors will demand they meet this challenge, while keeping multibillion-dollar projects on time and on budget.