The processing facility at the Suncor tar sands operations near Fort McMurray, Alberta, September 17, 2014.TODD KOROL/Reuters
Suncor Energy Inc. is overhauling its approach to tapping oil sands reserves as the industry grapples with high costs and new competition from U.S. shale oil.
Calgary-based Suncor is set to apply this year for a steam-driven oil sands development called Meadow Creek East, reviving an 80,000 barrel-a-day project that has been dormant for years. The plan is a joint venture with Nexen Energy ULC.
The project offers an early glimpse at Suncor's so-called "replication" strategy, which involves designing cookie-cutter oil sands plants to tap resource "pockets" as opposed to building a central processing and extraction facility to harvest a much larger region.
It marks the first in a series of planned developments touted by the company as a lower-cost method of lifting crude from underneath Alberta's boreal forests, as the industry braces for a lengthy stretch of crude prices well under levels of recent years.
"The resource is there. We're trying to figure out how do you bring it to market [in] a less-costly manner," Mark Little, Suncor's executive vice-president, upstream, said in April.
The collapse in oil prices since last summer has prompted waves of budget cuts and layoffs in Western Canada's energy industry, strained growth plans and stoked deep-seated anxiety over the sector's profitability. Suncor lost $341-million in the first quarter despite boosting production and shaving costs.
For years, oil sands companies have relied on cumbersome infrastructure that is expensive to build and difficult to adapt to shifting market conditions. That style of development persists; Suncor, for example, is spending as much as $1.6-billion this year as construction increases on the company's massive Fort Hills project, one of the most ambitious mining developments in years.
The $13.5-billion joint venture with France's Total SA and Teck Resources Ltd. is due to pump its first oil in 2017, adding 180,000 barrels a day of new capacity in northern Alberta over time.
Such projects have experienced large cost overruns and delays in the past, although Suncor has said Fort Hills is benefiting from a cooling market for labour and materials as competitors slam the brakes on growth projects.
Steve Williams, Suncor's chief executive officer, told shareholders last month the industry-wide slowdown has also prompted the company to accelerate the next phase of its growth – a series of bite-sized projects that together could add some 250,000 barrels a day of future production.
The strategy involves building standardized plants to target oil sands sweet spots. The company has identified nine such "pockets" of promising resource it aims to develop using existing steam-driven technologies. It is also experimenting with solvents and other technologies to reduce water use, officials say.
Suncor has not detailed costs, but some analysts say the approach could push the price tag for a new oil sands plant down by more than 15 per cent from today's levels.
"If you're consistently building the same project over and over again, you're going to get pretty good at it," said Chris Cox, analyst at Raymond James Ltd.
Meadow Creek East, located about 45 kilometres south of Fort McMurray, is designed to pump crude in phases. Initial production of between 20,000 and 30,000 barrels a day could start by 2020, pending regulatory approvals and a final investment decision slated for 2017 at the earliest. The original plans date to 2003 under Petro-Canada.
A capital cost for Meadow Creek has not been disclosed, but Suncor expects such projects could generate a 15-per-cent return on a full-cycle basis at a West Texas intermediate oil price of $75 (U.S.) a barrel, Barclays PLC analyst Paul Cheng said in a recent note, citing conversations with management.
Nexen has a 25-per-cent share of the project. Suncor is the operator.