December 1, 2016 • Vol. 6, No. 8docFinder alert
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In-Situ Oil Sands Cost Reductions Set Stage for Profit Growth on Oil Price Recovery


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Crushing oil sands operating costs

Cenovus

October 7, 2016

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Netback moves with oil prices

Cenovus

October 7, 2016

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CAPP estimates that 165 Bbbl of recoverable oil exist in the Canadian oil sands, which would make it the third-largest resource base in the world. Initially, oil sands were produced through open mining operations, but over the past 30 years in-situ production technologies have emerged to reach oil reserves too deep to mine and have played a major role is oil sands production. In fact, in 2010, oil production from in-situ technologies, mainly steam assisted gravity drainage (SAGD), has eclipsed oil production from mining in Canada and now accounts for nearly 60% of bitumen and upgraded crude oil production. With production costs such a focus for oil producers around the globe in this low-price environment, we were curious to see how Canadian oil sands producers are faring. We turned to docFinder, the most comprehensive and accessible source of oil and gas financial and operational information. We learned that Canadian oil sands producers, in particular in-situ operators, are cutting costs just as traditional conventional and unconventional operators have been through this price cycle. We also found that many of the costs of in-situ production are fixed, indicating that most of the incremental revenue that comes from higher oil price falls directly to the bottom line.

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Cenovus’ oil sands unit consists of its Foster Creek and Christina Lake SAGD operations, which it owns in partnership with ConocoPhillips. Collectively, these projects produced ~154,000 bo/d in 3Q16, 5% higher than a year earlier. Operating costs have fallen 31% since 2014 from $13.50/bbl to $9.38/bbl. However, operating costs, however, do not include transportation and blending costs, which add $7.00/bbl resulting in total costs of $16.38/bbl. Cenovus expects to hold onto operating gains into the future. With these cost reductions, the company says it can cover its operating and capital costs as well as its dividend at a $45-$50 WTI oil price.

Cenovus also illustrates how SAGD Canadian dollar netbacks vary at differing price levels. The interesting takeaway from this chart is that virtually all of the costs in a SAGD operation are fixed. Operating costs (C$10/bbl) and transportation costs (C$7/bbl) combined for C$17 per bbl across all price scenarios. The only cost that is variable is the royalty, which goes from C$0.25/bbl at $40/bbl to $2.00/bbl at $60/bbl. Consequently, virtually all of the price increase falls to the bottom line. Under the $40 WTI oil scenario, SAGD earns about C$4.00/bbl, but that number surges to $C23.00 under a $60.00 WTI price.

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featured.slides from docFinder

Slide Slide Slide Slide

CNRL

In-situ operating costs among lowest for CNRL

October 5, 2016

Imperial Oil

Reduces cash operating cost by 40% since 2014

September 21, 2016

Athabasca Oil Sands

Fixed costs lead to profit expansion

September 12, 2016

Suncor

SAGD is cost competitive

October 26, 2016

Canadian Natural Resources’ thermal in-situ oil sands activity is carried out in its Athabasca and Cold Lake deposits. In Athabasca, the McMurray reservoir, using SAGD technology, is the primary target. The Cold Lake deposits use cyclic steam stimulation (CSS) technology to produce oil from bitumen. In 3Q16, CNRL’s thermal in-situ operations produced over 103,000 bo/d, a 22% decline from 3Q15, but an 11% gain from 2Q16. The company expects 4Q16 production to be about 130,000 bo/d. Operating costs have declined 15% since 2014 to a midpoint of C$10.75/bbl. That makes thermal operations the second-lowest segment in terms of operating costs behind CNRL’s Pelican Lake EOR operation.

Cold Lake, Imperial Oil’s thermal in-situ operation had gross production of 157,000 bo/d in 3Q16 using CCS technology. The operation had a cash costs of just over C$15.00/bbl in 2015 and appears to have had another 15% decline in costs during 1H16. One-third of the savings are from fuel-related costs, while two-thirds are from process improvements including utilizing fully automated rigs which accounts for about 20% of its rig count.

Athabasca Oil Sands (AOS) has a similar chart to the Cenovus graphic illustrating netbacks at various price levels, but this one is for AOS’ Hangingstone 1 SAGD project. As was the case with Cenovus, Hangingstone’s Canadian dollar netback moves in tandem with changes in oil price. Total operating and transportation costs of C$28.00/bbl, which consist of operating costs ($19.00/bbl) and transportation costs ($9.00/bbl), remain stable with only royalties and diluent costs varying with oil prices.

Suncor’s oil sands business consists of a mixture of mining and in-situ operations. Firebag is the largest of its two in-situ SAGD operations, producing 197,600 bo/d, or 88% of in-situ production in 2Q16. Suncor also reported in 3Q16 that in-situ production costs were C$10.45/bbl, the cheapest source of production in its entire oil sands portfolio. The chart illustrates the sharp reduction in drilling and pump maintenance costs at Firebag since 2012. Suncor was able to reduce these costs by 60% through customizing drilling rigs, as did Imperial Oil, utilizing new drilling technologies and well designs, as well as improving well-completion techniques.

 

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