Skip to main content

Cenovus Energy Inc. will decide next week if it will go ahead with an expansion at its Christina Lake project in northeastern Alberta, which it shelved as oil prices collapsed in 2014.

Hand-out/CENOVUS ENERGY INC.

The oil industry's new-found optimism is about to be put to the test as one of Canada's biggest producers decides whether to revive a stalled oil sands project.

Cenovus Energy Inc. will decide next week if it will go ahead with an expansion at its Christina Lake project in northeastern Alberta, which it shelved as oil prices collapsed in 2014.

The decision comes in the wake of two big changes seen as highly favourable to a downtrodden industry – Ottawa's approval of pipeline expansions to the B.C. coast and U.S. Midwest and a deal among members of the Organization of Petroleum Exporting Countries to cut production from record levels.

Story continues below advertisement

The developments point to increases in transport capacity and access to new markets for Canadian crude, and big jumps in corporate revenues, assuming OPEC members stick to their new output allocations to keep global oil prices rising. They follow two years of contraction that have taken a heavy toll on corporate fortunes and employment levels in Western Canada.

Calgary-based Cenovus is due to announce its 2017 budget on Dec. 8. Chief executive officer Brian Ferguson has indicated a modest capital spending increase from this year's $1.05-billion is in the offing. It is also expected to decide on the fate of the 50,000-barrel-a-day Christina Lake expansion.

A company spokesman declined to say whether the project is a go, but suggested conditions are improving. It is one of 13 backers of the Trans Mountain expansion from Alberta to British Columbia. "One pipeline project alone doesn't make a market, but it is a very positive step forward for sure," spokesman Brett Harris said on Thursday.

U.S. oil prices have surged 14 per cent since Monday as markets cheered OPEC's return to discipline on production levels. West Texas Intermediate settled up $1.62 (U.S.) at $51.06 a barrel on Thursday.

"The oil price being higher is a positive thing. I would just say that it's a ways off before we understand if this cut's actually going to happen and how long it's going to be sustained," said Jackie Forrest, vice-president at ARC Financial Corp. "So I wouldn't say it takes the uncertainty from prices or the concerns around volatility. You're still going to be cautious as the CEO of a company."

This week's federal approval of Kinder Morgan Canada Inc.'s $6.8-billion (Canadian) Trans Mountain expansion and Enbridge Inc.'s $7.5-billion Line 3 replacement project to the United States promises to solve long-standing export snarls that have weighed on prices for Canadian oil – assuming the projects are built.

Ms. Forrest and others said pipeline approvals are potentially positive for future developments, but the route to new markets is still a long one, given the risks of legal challenges by First Nations or environmental groups as well as other delays.

Story continues below advertisement

"Until you see that pipeline under construction, you've still got uncertainty," she said.

Still, even if the oil-price rally sputters, oil sands projects currently under construction stand to add more than 300,000 barrels a day of new capacity over the next two years, according to consultancy group Wood Mackenzie.

Few are predicting a return to bumper budgets. Overall capital spending in the sector is pegged in the $9-billion (U.S.) to $10-billion range next year, down sharply from about $29-billion in 2013, when oil topped $100 a barrel, according to the consultancy.

Some producers are focused on finishing partially completed projects. Last month, Canadian Natural Resources Ltd. said it would revive its Kirby North development. It had shelved the 40,000-barrel-per-day project last year, despite spending $700-million (Canadian). Remaining costs are pegged at $650-million, with startup targeted for 2020.

More such projects will see the light of day once U.S. crude prices find stability around $50 (U.S.) a barrel, with expansions to existing steam-driven plants requiring prices closer to $60 to generate healthy returns, Royal Bank of Canada said this week in a research note.

The industry has benefited from falling development costs and a weakening Canadian dollar even before the recent developments added new optimism, said Samir Kayande, analyst at RS Energy Group in Calgary.

Story continues below advertisement

"You combine those two and relative to where we were in 2014, you get a 25-per-cent lift on your revenue and maybe a 10 per cent or 20 per cent reduction in your costs. All those things are material and they significantly reduce the break-even oil price that you need to make a new investment decision," Mr. Kayande said. "This is absent of commodity price and absent of pipelines."

However, light crude prospects, such as those in the Permian area of Texas, offer quicker payouts and fatter margins than anything available in the oil sands, so for many companies those will be much more attractive to develop, he said.

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • All comments will be reviewed by one or more moderators before being posted to the site. This should only take a few moments.
  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed. Commenters who repeatedly violate community guidelines may be suspended, causing them to temporarily lose their ability to engage with comments.

Read our community guidelines here

Discussion loading ...

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.
Cannabis pro newsletter