Canada's oil sands producers are struggling to adjust to much lower crude prices despite jettisoning thousands of employees and slamming the brakes on billions worth of growth projects.
The central challenge faced by the sector involves whittling down a cost structure built for $100 (U.S.) oil, before the explosive growth in U.S. shale supplies upended global markets and the Organization of Petroleum Exporting Countries abandoned its historic role of cutting output to prop up prices.
Now, with oil prices hovering at about $60 a barrel and multibillion-dollar pipeline projects on shaky ground, some oil sands executives are raising alarms over festering productivity challenges and technological short-comings in an industry long described from the inside as leading edge. Even the cushion of a weak Canadian loonie, which has bolstered returns during the downturn, is beginning to wear thin.
"That's a temporary fix," Paul Masschelin, executive vice-president of finance at Calgary-based Imperial Oil Ltd., said at a conference in New York on Monday.
"To be very frank, Canada has a productivity deficit relative to other parts of the world, and we're going to have to bridge that because we are competing in a global marketplace."
The comments reveal a deep-seated anxiety as oil sands companies weigh future growth opportunities against the prospect of a lengthy slump in crude prices – the result of what some analysts have dubbed a structural shift in global crude markets.
Imperial, which is majority-owned by Exxon Mobil Corp., is "weeks away" from finishing an $8.9-billion (Canadian) expansion of its Kearl mine, Mr. Masschelin said. The project will double Kearl's capacity from 110,000 barrels a day.
Like others, however, Imperial has been cautious when mapping out new developments. Last month, Royal Dutch Shell PLC delayed the planned startup of its Carmon Creek oil sands project by two years, saying it needed more time to wring cost savings from suppliers.
Such efforts are showing early signs of success. Costs at Suncor Energy Inc.'s Fort Hills construction site have fallen by about 5 per cent as competition in northern Alberta for labour and materials eases, chief financial officer Alister Cowan said on Monday. The $13.5-billion project is due to add 180,000 barrels a day of new oil sands capacity starting in late 2017.
Some analysts doubt whether those reductions will last, but other steps taken by companies point to more enduring changes in what remains one of the priciest extraction zones in global oil.
Suncor, for one, aims to roll out automated heavy-haul trucks at its mine sites by the end of this decade, as it seeks to dramatically reduce the number of workers employed at such projects.
The move could eliminate 800 positions that each command six-figure salaries, Mr. Cowan said at the Royal Bank of Canada conference in New York.
"It's not fantasy," he insisted, citing similar efforts at mining sites in Australia.
Rival Husky Energy Inc. has cut in half the space between wells drilled at its Sunrise oil sands project, helping to shrink the overall size of well clusters called "pads" by 40 per cent compared to older designs, according to chief operating officer Rob Peabody.
The change has reduced the amount of steel used at such sites by 60 per cent – a "huge" cost savings, he said at the conference.
Still, the concept of pumping steam underground to tap seams of bitumen buried too deep to mine remains little altered from the technology's earliest days. At the same time, earnings across the sector have been hammered by low oil prices, making newer projects harder to justify to anxious shareholders.
Canadian Natural Resources Ltd., one of the industry's largest players, targets after-tax returns of 15 per cent – a level that's "very difficult to achieve" at $60 (U.S.) oil, Doug Proll, an executive vice-president with the company, told analysts in New York.
"Right now, we're going to need a lot of help in terms of technological innovation for new projects post-2020," he said.