By Chester Dawson
Two years ago Canadian oil sands producer Cenovus Energy Inc.,
buoyed by success at its flagship project and eager to cut
operating expenses, halved the amount of instrumentation used to
measure finicky temperature and pressure at its wells.
But that turned out to be a costly mistake that cut into its
Foster Creek site's production volumes, which only have recently
recovered after the company reversed course.
"We started to cut our operating costs, but in hindsight that's
a lesson learned," Harbir Chhina, Cenovus' executive vice president
in charge of oil sands, said in an interview. "If I compare the oil
sands to a baseball game, I think we just finished the first
inning," he said.
Of the roughly two million barrels a day that Canada currently
produces from its oil sands, about half is mined from the surface
using giant excavators and the world's tallest dump trucks. The
rest is too deep to mine and must be recovered by newer technology
such as injecting steam underground to leach out oil deposits. That
accounts for about 80% of Canada's reserves--the world's third
largest source of untapped crude.
The global downturn in oil prices is shining a harsh light on
the high cost of extracting Canada's oil sands, which are the
biggest single source of U.S. crude imports. Some of the world's
biggest oil companies, including Royal Dutch Shell PLC and Exxon
Mobil Corp.'s Canadian unit, Imperial Oil Ltd., are counting on
those deeply buried oil sands deposits to increase cash flows and
shore up their global production levels.
Chronic cost overruns amid the pressure of lower oil prices are
calling into question how much of those reserves can be recovered
profitably.
The most common technique for extracting the deepest deposits
involves drilling a pair of horizontal tunnels that bracket an
underground oil formation from above and below. Steam pumped into
the top chamber melts solidified oil, which gradually drips into
the lower well, where it is collected and pumped to the surface. In
industry circles, it is known SAGD, or steam assisted gravity
drainage and has no relation to hydraulic fracturing, which uses a
single well and high-pressure injections of unheated water to
release oil from shale formations.
But this method is turning out to be more technologically
complex and unpredictable than billed when first deployed
commercially in the early 2000s.
The key unforeseen challenge with the technology has been the
lack in uniformity in reservoirs of heavy crude, or bitumen, in
ancient river beds that now lie buried under the boreal forests in
Canada's western Alberta province.
Operators are having to drill more wells, pump more steam
underground and lay more pipe above ground to meet targets, thanks
to varying thickness, impermeable rock formations and high
water-saturation levels. The result is a lot of trial and error as
kinks are worked out.
"The technology isn't one-size-fits-all," said Reynold Tetzlaff,
PricewaterhouseCoopers' Canada energy team leader, noting that the
continuing capital requirements necessitate strong balance sheets.
"It's getting harder and harder for smaller companies to make a go
of SAGD."
Many of their projects were greenlighted when prices were
higher, or believed to be heading higher. But what was tolerable a
year ago at $100 a barrel has become less profitable--or
unworkable--in today's world of $50 a barrel crude. The break-even
point for a brand-new SAGD project, including a 9% average return
on investment, requires crude prices of at least $65 a barrel,
which is among the highest extraction cost in the oil industry,
according to the Bank of Nova Scotia.
On Wednesday, U.S. oil prices dipped below $50 a barrel after
weekly data showed an unexpected increase in U.S. supplies.
Several once-promising Canadian junior oil-sands producers that
bet on this form of extraction have suspended operations and sought
protection from creditors, including Connacher Oil & Gas Ltd.,
Ivanhoe Energy Inc., Laricina Energy Ltd. and Southern Pacific
Resource Corp.
Most oil-sands startups and a few large producers--such as
Cenovus--rely entirely on SAGD and most of the oil sands'
multinational players also use it for some of their current output
or are counting on it for their future production plans.
Cenovus, Canadian Natural Resources Ltd., Suncor Energy Inc. and
Shell all announced plans earlier this year to shelve--but not
abandon--plans for new or expanded subsurface oil sands projects
until global oil prices rebound or costs can be reduced
dramatically.
Even before the tumble in oil prices, France's Total SA and
Statoil ASA of Norway indefinitely postponed a pair of underground
oil sands projects last year, citing cost issues.
SAGD was developed conceptually in the late 1960s and tested in
the 1970s by Exxon's Imperial unit. While it has licensed the
technology broadly since then to rivals, the company has yet to
deploy it beyond the test phase.
Rich Kruger, the chief executive of Imperial, said the
technology holds promise but that other, more shovel-ready
extraction methods have taken priority. "It's more [about]
technical readiness," Mr. Kruger said. "We've invested a lot of
time and energy in SAGD and are very confident in it. [But] we look
to optimize it to get the most of it," he said.
Even some of the richest deposits have proved more difficult to
develop than envisioned, requiring more steam per barrel to
separate hockey puck-hard heavy oil embedded in sand. Suncor's
biggest SAGD project, known as Firebag, uses 40% more steam per
barrel than it was initially designed for, despite a decade of
operation, according to a recent report by Calgary investment bank
Peters & Co.
"We believe that most companies in the oil sands are drilling
significantly more wells than initially planned to keep production
rates stable," a recent Peters report said.
Cenovus talked boldly this time last year of introducing mass
manufacturing to Canada's remote oil patch by ramping up
installation of 30,000 to 50,000 barrel-per-day well-site modules.
But after the crude price slump, the company slashed its 2015
spending budget, deferred new SAGD expansion phases and, in late
May, ushered out half its executive leadership, including the
COO.
The Calgary-based oil sands major says the personnel changes
were long in the works and that it views the deferments as
temporary.Cenovus executive Mr. Chhina notes Foster Creek, the
industry's first large-scale SAGD project, recouped its
multibillion-dollar construction cost within a decade of starting
up in 2001 and is among the most efficient production sites. "SAGD
is a proven technology but it definitely still needs to be tweaked
here and there," he said.
Write to Chester Dawson at chester.dawson@wsj.com
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