Surging oil prices and tumbling construction costs have pulled Alberta's stalled oil sands across a major threshold to future profitability, creating new expectations that a comeback may not be as far away as once feared.
Declines in the cost of steel and labour have combined with crude prices that yesterday neared $70 to bring the oil sands "back in black," said UBS Securities analyst Andrew Potter.
In a research report released yesterday, Mr. Potter calculated that new projects now need only $60 (U.S.) crude to turn a 10-per-cent profit. The very best projects, such as EnCana Corp.'s Foster Creek-Christina Lake, need only $40.
Those new estimates mark a dramatic turnaround from last fall, when analysts calculated that projects in Fort McMurray required $100 oil, as huge demands for labour and commodities pushed costs to extreme highs.
When oil tumbled far beneath that level, the industry delayed or outright cancelled a vast amount of projects.
By one estimate, more than $230-billion in planned spending was yanked.
Now, Mr. Potter said, the conditions are ripe for some of those capital plans to be revived.
"We thought it would take a couple of years of costs to come down sufficiently, but it's happened in eight months or less," he said.
"At the end of the day, we expect most projects will ultimately be resanctioned. But it's not all happening at once."
Last week, Imperial Oil Ltd. became the first company to announce a major new project since oil fell below $40 from its triple-digit high last summer, with its $8-billion Kearl oil sand mine.
Suncor Inc. is widely expected to be next, and has broadly hinted that two projects - the expansion of its Firebag in situ oil sands extraction site and its Voyageur bitumen upgrading plant - will resume after the closing of its merger with Petro-Canada.
Mr. Potter believes Sunrise, the Husky-BP project, will resume in early 2010.
Additional phases of Canadian Natural Resources Ltd.'s Horizon project could also be brought back in 2010, while the expansion of Nexen Inc.'s Long Lake could resume in late 2010 or early 2011, he said.
But he is hopeful that companies will avoid the mad building rush that triggered last year's dramatic runup in costs.
One major reason is the Suncor-Petrocan merger, which will take two companies with competing plans - and competing needs for labour and equipment - and transform them into a single entity that is more likely to proceed in a sequential fashion.
That alone will chop 10,000 workers from Alberta's peak labour demand, said Mr. Potter, who now estimates the province will require half the construction workers once believed necessary over the nex t few years.
Plans by CNRL and Nexen to split future work into smaller chunks should also help, he said.
Other factors are also making the industry gun-shy. For one, few believe construction costs - which tripled between 2000 and 2008 - have actually hit bottom yet.
The past year has also brought new financial risks in the form of proposed greenhouse gas regulations that could be especially costly to the energy-intensive oil sands.
"We need some clarity on climate change regulations," said Nexen spokesman Tim Chatten.
"And I think there are enough question marks over the price of oil that not everyone is going to be rushing to do a project in the oil sands all at once."
Most companies base spending decisions on higher long-term oil prices.
Still, having current prices rise well above $65 has also helped renew confidence, said Sveinung Svarte, chief executive officer of Athabasca Oil Sands Corp.
"If you look ahead, the forward curve for 2012 and 2013 is around $80 or $85 per barrel," he said. "But you always feel better when the oil price is closer to your long-term forecast."