Analysis: U.S. shale boom forces change in Canadian oil patch

Mon Feb 25, 2013 6:30pm EST
 

By Jeffrey Jones

CALGARY, Alberta (Reuters) - The U.S. shale oil revolution is forcing Canada's oil sands industry to question whether there is a future in processing its crude into lighter oil, a tried-and-true way of wringing the most money out of a resource considered crucial to the country's prosperity.

Suncor Energy Inc (SU.TO: Quote), which nearly 50 years ago pioneered the practice in Canada of mining and then upgrading the oil sands bitumen into refinery-ready light crude at the same site, served notice this month that the era of the integrated project may be ending.

It said it was reexamining a plan to build a multibillion-dollar upgrading plant in northern Alberta and taking a C$1.5 billion ($1.5 billion) charge to account for lower projected cash flow. The reason: cheap oil from North Dakota and elsewhere is making it uneconomical over the long haul to build such complexes.

"Why would you spend billions of dollars to build an upgrader to create a product that is looking to be oversupplied in the markets you can access today?" said Jackie Forrest, director of global oil for consultancy IHS CERA.

The Suncor move is more evidence of a shift from upgrading that is already well underway. Imperial Oil Ltd (IMO.TO: Quote), for example, is building the C$12.9 billion Kearl development - the next major oil sands project to come online - without a processing plant.

Once considered a sure winner by most Canadians, the oil sands industry is now on the defensive on several fronts, struggling to prove it can deliver its raw materials to refiners at a competitive price and at an acceptable environmental cost

The dilemma over upgrading points to more problems ahead as oil sands producers compete for capital against the developers of the cheaper, less damaging shale oil.

With less-processed heavy oil competing with the increased Bakken flows for pipeline space to U.S. refineries, a glut in Western Canada has built up, generating a wide discount on Canadian crude against benchmark West Texas Intermediate. That has created an immediate problem, not the least for Alberta, the province at the center of Canada's oil industry.   Continued...

 
The Suncor tar sands plant and tailings pond at their tar sands operation north of Fort McMurray, Alberta, November 3, 2011. REUTERS/Todd Korol