Oil-sands companies are poised to crank up billions' worth of new production just when the market doesn't need it, deepening a supply glut even as profit margins in the high-cost sector shrivel.
Major producers, such as Suncor Energy Inc., ConocoPhillips Co., Husky Energy Inc. and others, are pressing ahead with expansions that could add roughly 800,000 barrels per day of fresh capacity in northern Alberta by 2018, according to new data compiled by ARC Financial Corp.
About half of the total will start up this year, in the midst of a deep slump in energy markets that has prompted thousands of layoffs and rendered some oil-sands production uneconomic.
The timing highlights a stark dilemma for companies that sank billions into megaprojects when oil prices were higher, and now face the prospect of a lengthy downturn: Should they keep pumping at all?
"At these prices, you're not even getting a return," said Jackie Forrest, vice-president at ARC, a Calgary-based private-equity firm. "You're just covering your operating costs. You're not even able to pay off a big, upfront capital investment that you made."
U.S.-based ConocoPhillips last week started production from the second phase of its Surmont oil sands project. The joint venture with Total SA of France started construction in 2010 and is expected to yield 118,000 barrels per day by 2017.
Also last week, Husky said it took initial steps to boost output at its multibillion-dollar Sunrise joint venture with BP PLC, saying production would climb to 60,000 barrels daily by year-end 2016.
It makes sense to go ahead with such projects even as oil prices languish below $50 (U.S.) a barrel, Ms. Forrest said, in part because much of the big capital is spent up front. "If you don't do anything with this asset, you still spent $2-billion," she said.
It's a sharp contrast with U.S. shale producers, who have parked drilling rigs by the hundreds to cope with the collapse in oil prices. Production in once-booming regions in Texas has begun to moderate, falling 1.9 per cent between May and June, the U.S. Energy Information Administration reported last week.
Oil-sands production, by contrast, is forecast to keep climbing until the end of the decade, even as low prices crimp margins. The break-even cost for steam-driven plants, including operating costs, maintenance and sustaining capital, varies from $47 a barrel up to $65 a barrel, depending on the producer, according to ITG Investment Research. U.S. crude on Friday closed at $46.05 per barrel.
Unlike shale drillers, however, oil-sands companies cannot easily cease production to cope with low prices. Nor are they likely to pull back on projects already under development, analysts say. Instead, producers have focused on slashing costs, betting that prices will rise enough over time to justify today's multibillion-dollar investments. A weak loonie has also bolstered returns.
"If you're an operating facility already, it makes sense to produce the revenue as much as you can," said Samir Kayande, an ITG analyst in Calgary. "You're not making it up in volume. You're just doing the best you can with the hand you've been dealt."
For steam-driven plants especially, a combination of tricky geology and logistical challenges makes outright shutdowns a last resort.
Earlier this year, for example, Cenovus Energy Inc. and Canadian Natural Resources Ltd. temporarily shut down facilities because of encroaching wildfires, curtailing as much as 10 per cent of Alberta's oil-sands output.
Last week, Chinese-owned Nexen Energy ULC halted output indefinitely at its Long Lake oil-sands facility in response to an emergency order issued by the Alberta Energy Regulator.
A prolonged outage could make restarting such projects difficult, said Farouq Ali, a chemical and petroleum engineer at the University of Calgary's Schulich School of Engineering. Over time, super-heated steam cools and condenses into water, fouling reservoir conditions, he said.
"It's not a case where you turn the switch and it will shut off," he said. "It's a big task."