In ‘marginal’ oil sands, cost efficiency crucial, says new Statoil Canada head

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The oil sands are a "marginal" resource, and Statoil ASA's new Canadian president believes companies tapping it must substantially optimize the way they work, or risk fumbling a play that could prove to be the world's largest.

Stale Tungesvik came to the oil sands after a 30-year energy career that has seen him work in offshore oil and renewable power – and the latter bears more in common with north-eastern Alberta than many might think, he said in an interview Monday.

"There's a lot of similarities," he said. Both wind power and oil sands are "kind of marginal things."

The difficult economics of the oil sands are a theme that permeates Mr. Tungesvik's view of an industry he has just joined. He has yet to travel to Statoil's oil sands operations, and is just beginning a job that will see him spend three – and more, he hopes – years atop a company that, with its Thai partner PTTEP, is building toward 220,000 barrels a day of oil sands production by 2025. Statoil is also open to buying up more land, acknowledging that some of its current holdings aren't great.

But, like other energy heavyweights in recent months, Mr. Tungesvik emphasized that oil sands growth is being challenged by the cost of building an industry that is endowed with vast amounts of oil, but also costly development.

"We think it's a little bit difficult to run these projects if you don't have that perspective of long-term" because other projects pay back costs much more rapidly. "I think we are, as a company, going through a learning process of really understanding the benefits of the long tail of income, of cash flow, after you have done the rather huge investment in the beginning."

He said technological advances are critical enough that Statoil would be willing to slow growth to perfect innovations that can allow it to extract more barrels at a lower cost. "To be competitive, you need to really optimize, that's for sure," he said.

If that doesn't happen, "then I think you're out. Then I think there is no future. You need to be cost-efficient all the time," he said.

At the same time, there is a huge prize for getting things right. He referred to a new "solvent" technology that numerous companies are developing. Instead of just injecting steam underground to heat up and melt out the oil sands bitumen, solvents like propane and butane can be used to make the bitumen flow, reducing the need for both water and the natural gas used to heat it up.

Solvent technology could open access to much thinner layers of underground bitumen, with the potential to dramatically expand how much oil sands crude can be brought to surface.

If, with "hot solvent injection ... five-metre zones are suddenly recoverable and in a profitable way, that will make the oil sands resource to be the biggest in the world, by far," Mr. Tungesvik said.

He added: "It's just like a big cake out there and everyone wants to grab it – but we have to find out how to cut it."

There are other problems in the oil sands, however. Mr. Tungesvik is worried about "volumes getting stranded," as Canadian barrels fight for space on export pipelines with new U.S. production. The construction of new infrastructure, especially in pipelines, is critical, he said, although Statoil is working to devise its own ways to get oil to market. It has ordered 400 to 500 rail cars for use in Canada, as an example. Rail is emerging as an important alternative for companies seeking the most profitable market for their product.

"We're in here for the money. So if it's profitable, we will do it," he said.

Yet for Statoil in particular, the profit imperative comes up against shareholders in Norway, as expressed through the majority government ownership share, who have often raised concern about the company's participation in an industry often accused of peddling a dirty product.

"I have been a little bit amazed, actually, when I was back in Norway to see there's a lot of feelings involved in talking about oil sands," Mr. Tungesvik said. "People tend to forget [Canada] is a highly developed democracy. This is a nation that really knows how to take care of their wildlife, their local societies, their resources."

Despite criticism back home, Statoil is interested in expanding its oil sands presence as it deals with areas of its land that are less than outstanding, he said.

"We have, I would say, mixed reservoir quality. We are aware of that," he said. He added: "We are doing business development continuously. So if there is an opportunity popping up that is right, we will act. And if not, we will wait."