More oil firms move into costly oil sands

LONDON – More oil firms are joining the rush to tap oil from sands in Canada’s Alberta province, a costly process that may secure future output but needs higher oil prices to make money.

Norway’s Statoil last month agreed to buy a privately held Canadian oil sands venture for nearly US$2 billion, following deals by the likes of France’s Total and China’s Sinopec. The moves into oil sands offer access to oil reserves that rival those of Saudi Arabia and lie outside the volatile Middle East.But Statoil’s deal looks expensive and the rewards lie far in the future, analysts say.”I’m slightly sceptical about large new positions in Canadian oil sands,” said Jason Kenney, oil analyst at ING in Edinburgh, who has a “hold” rating on Statoil.”My view of the Statoil deal is it’s a huge expense for a company of that size.It will be capital intensive.”Cash-flow rewards are possible but they are a long way away.”Unlike conventional oil, oil sands are deposits of bitumen, a heavy, viscous oil that must be converted into an upgraded crude oil before refineries can use it to make petrol.The rise in investment comes as companies face growing challenges in finding big sources of conventional oil.Saudi Arabia is off-limits to foreign oil investors and areas like the North Sea are in decline.While conventional crude oil flows naturally from reservoirs or is pumped out, oil sands are mined or recovered “in situ” by injecting steam into the ground.The separation of oil from sand uses large volumes of natural gas, contributing to emissions blamed for causing climate change.Nuclear power has been proposed as an alternative.Statoil in April said it agreed to buy North American Oil Sands Corporation, aiming to broaden its production away from ageing oilfields in the North Sea.”We are building a large resource base in a stable region which will provide long-term growth after 2010,” Statoil Chief Executive Helge Lund told Reuters.Still, rising costs and uncertainties such as oil-sands projects’ vulnerability to future efforts to curb carbon emissions could hit returns, particularly for new entrants, according to Citigroup.Major oil companies that have shunned oil-sands projects so far can live without them, the investment bank argues.”Should those that have missed this play redouble their efforts to access the oil sands? Not necessarily,” Citigroup said in a research note.”The appeal of the resource base is not enough, we argue, to make this play essential to the majors.”Among larger oil companies, ConocoPhillips has the most exposure to oil sands, which will account for eight per cent of its production by 2010, Citigroup said.Unlike peers Royal Dutch Shell and Exxon Mobil, BP Plc has avoided investing in oil sands and is expected to have no production from such ventures by that time.So far, there is no sign that BP’s strategy will change under new Chief Executive Tony Hayward, who took over the top job following John Browne’s resignation in May.”We’ve got plenty of opportunities elsewhere in the world in conventional oil and gas, so we haven’t needed to invest in oil sands,” BP spokesman Toby Odone said.Tapping oil from sand costs more than a regular oil project.Oil sands ventures are economically viable only at an oil price above US$40 a barrel, Citigroup estimates, at least US$5 more than for a conventional project.It takes about two tonnes of oil sand to produce a barrel of oil.Costs have risen as a raft of projects has squeezed the supply of labour and pushed up prices for materials like steel.Even so, the scale of the reserves is vast.Canada ranks second in proven crude reserves after Saudi Arabia, according to Alberta’s government.Most of those resources are in Alberta’s oil sands of over 174 billion barrels.Analysts such as the International Energy Agency are optimistic about the potential for oil sands to help meet growing demand – if prices stay high and technology improves.”If the prices remain very high for several years, of course this non-conventional oil will become much more profitable,” said IEA Chief Economist Fatih Birol.Nampa-ReutersThe moves into oil sands offer access to oil reserves that rival those of Saudi Arabia and lie outside the volatile Middle East.But Statoil’s deal looks expensive and the rewards lie far in the future, analysts say.”I’m slightly sceptical about large new positions in Canadian oil sands,” said Jason Kenney, oil analyst at ING in Edinburgh, who has a “hold” rating on Statoil.”My view of the Statoil deal is it’s a huge expense for a company of that size.It will be capital intensive.”Cash-flow rewards are possible but they are a long way away.”Unlike conventional oil, oil sands are deposits of bitumen, a heavy, viscous oil that must be converted into an upgraded crude oil before refineries can use it to make petrol.The rise in investment comes as companies face growing challenges in finding big sources of conventional oil.Saudi Arabia is off-limits to foreign oil investors and areas like the North Sea are in decline.While conventional crude oil flows naturally from reservoirs or is pumped out, oil sands are mined or recovered “in situ” by injecting steam into the ground.The separation of oil from sand uses large volumes of natural gas, contributing to emissions blamed for causing climate change.Nuclear power has been proposed as an alternative.Statoil in April said it agreed to buy North American Oil Sands Corporation, aiming to broaden its production away from ageing oilfields in the North Sea.”We are building a large resource base in a stable region which will provide long-term growth after 2010,” Statoil Chief Executive Helge Lund told Reuters.Still, rising costs and uncertainties such as oil-sands projects’ vulnerability to future efforts to curb carbon emissions could hit returns, particularly for new entrants, according to Citigroup.Major oil companies that have shunned oil-sands projects so far can live without them, the investment bank argues.”Should those that have missed this play redouble their efforts to access the oil sands? Not necessarily,” Citigroup said in a research note.”The appeal of the resource base is not enough, we argue, to make this play essential to the majors.”Among larger oil companies, ConocoPhillips has the most exposure to oil sands, which will account for eight per cent of its production by 2010, Citigroup said.Unlike peers Royal Dutch Shell and Exxon Mobil, BP Plc has avoided investing in oil sands and is expected to have no production from such ventures by that time.So far, there is no sign that BP’s strategy will change under new Chief Executive Tony Hayward, who took over the top job following John Browne’s resignation in May.”We’ve got plenty of opportunities elsewhere in the world in conventional oil and gas, so we haven’t needed to invest in oil sands,” BP spokesman Toby Odone said.Tapping oil from sand costs more than a regular oil project.Oil sands ventures are economically viable only at an oil price above US$40 a barrel, Citigroup estimates, at least US$5 more than for a conventional project.It takes about two tonnes of oil sand to produce a barrel of oil.Costs have risen as a raft of projects has squeezed the supply of labour and pushed up prices for materials like steel.Even so, the scale of the reserves is vast.Canada ranks second in proven crude reserves after Saudi Arabia, according to Alberta’s government.Most of those resources are in Alberta’s oil sands of over 174 billion barrels.Analysts such as the International Energy Agency are optimistic about the potential for oil sands to help meet growing demand – if prices stay high and technology improves.”If the prices remain very high for several years, of course this non-conventional oil will become much more profitable,” said IEA Chief Economist Fatih Birol.Nampa-Reuters