A race to lower costs among Canada's biggest oil sands companies and U.S. shale players is likely to intensify as OPEC kingpin Saudi Arabia appears set to keep pumping crude into a depressed market.
The Organization of Petroleum Exporting Countries is expected to maintain its production quota of 30 million barrels a day when the cartel meets on Friday in Vienna, heightening pressure on North American rivals to slash costs or defer investment in new projects as Saudi Arabia and its Gulf allies show few signs of changing course.
For months, the kingdom has been pumping flat-out in a bid to defend market share, breaking from its historic role of supporting prices with production cuts. Analysts say the strategy has paid off and is unlikely to change, despite calls from within the fractious group to curb output.
"Even your production hawks are pretty much on board with the fact that the Saudi strategy is working," said Phil Flynn of Price Futures Group in Chicago.
"It has slowed the U.S. shale producers down a little bit. Over time, it has brought up prices, it has cut back capital spending and it's made OPEC viable, at least in the short term."
The strategy has sent shock waves through high-cost regions such as Canada's oil sands, prompting a desperate scramble to claw back expenses and a broader rethink about the economics of developing Alberta's tarry deposits of bitumen.
Indeed, efforts to drive down the cost of lifting crude from underneath the province's boreal forests have lagged gains made in U.S. shale plays, which some analysts and executives say have proved far more resilient in the face of skidding oil prices than many thought possible.
"Innovations have already led to a U.S. energy renaissance. Tight oil reservoirs can remain viable today, break-even costs are already down by 15 to 30 per cent," Ryan Lance, chief executive officer of U.S.-based ConocoPhillips Co., told an OPEC forum in Vienna on Thursday, according to Reuters.
Those savings stand in sharp contrast to persistent uncertainties about whether oil sands companies are equipped to weather an extended downturn in commodity prices.
Already, billions worth of new growth projects in the resource have been squelched, and executives at some of the sector's largest companies are balking at future investments.
This week, a Canadian Natural Resources Ltd. executive said the company would be hard-pressed to earn sufficient returns on new projects at $60 (U.S.) oil – a level some analysts view as likely to persist for some time as U.S. inventories remain elevated, despite signs of increasing demand.
"That's going to change the economics for a number of these projects," said Martin King, director of institutional research at FirstEnergy Capital Corp. in Calgary. "They either will have to be smaller, or the costs will have to be lower – it's a bit of a different world for them."
So far, a number of companies say they have benefited from the slowdown in activity, pointing to cooling demand for scarce materials and improving productivity levels.
That has enabled bigger and more well-financed players such as Suncor Energy Inc. to press ahead with projects such as its $13.5-billion (Canadian) Fort Hills mine, a joint venture with Teck Resources Ltd. and Total SA of France.
There are doubts about whether such gains will last, however, and newer technologies with the potential to dramatically lower costs remain years away from commercial application.
A spike in volatility driven by OPEC's decision last November to maintain production levels makes tight oil comparatively more attractive, said Jackie Forrest, vice-president at ARC Financial Corp.
"You get a payback fairly quickly and you can bring it on when you see the price is a little higher and slow down your program when the price dips," she said. "Once you've committed to oil sands, then you have three to four years where you're stuck spending that money regardless of what happens to prices in that time period. They're just bigger bets."