Business·Analysis

Oilsands players hammer down costs, but is it enough?

Suncor, Cenovus and MEG Energy have all brought down their costs to produce a barrel of oil. But red ink still flowing in the oilsands.

New investment still uncertain as Suncor, Cenovus and MEG Energy see some improvement

Aerial photo of an oilsands mine facility near Fort McMurray, Alta., taken Sept. 19, 2011. (Jeff McIntosh/Canadian Press)

The cost of producing a barrel of oilsands oil has come down substantially, but red ink continued to rule the day in the Alberta energy sector as third-quarter earnings rolled out this week.

Suncor — one of three major oilsands producers that reported earnings in the past 24 hours — said that its operating costs decreased to $22.15 a barrel, an 18 per cent reduction over last year. In 2013, those operating costs were $37 a barrel.

At Syncrude, in which Suncor has a majority stake, operating costs per barrel dropped to $27.65 a barrel.

Cenovus said that its operating costs have dropped by 30 per cent since 2014 (excluding the price they pay for natural gas, which is set by the market).

'As we move into recovery and prices come up, we don't expect them to come up too quickly.' - Kevin Birn , energy analyst, IHS Markit

For MEG Energy, operating costs at its Christina Lake project dropped by 14 per cent, year over year, to $7.76 per barrel of oil.

Suncor turned a profit in the quarter. Cenovus reported a  $251-million loss for the third quarter. MEG lost $109 million.

Two years of cost cutting

"It's very positive," said Kevin Birn, energy analyst at research firm IHS Markit.

"Necessity is the mother of invention: lower oil prices and the realization that lower oil prices are here for a sustained period. As we move into recovery and prices come up, we don't expect them to come up too quickly."

Two years of cost cutting may appear to have brought costs low enough that the major oilsands players can spin decent cash flow at sub-$50 US oil, but that typically only takes into account the facility costs — those incurred on the project to produce a barrel of oil, but not to dilute it for shipment, nor transportation costs, capital costs or head office costs.

When those expenses are included, Birn said, the break-even point for existing projects ranges between $30 and $40 a barrel.

Layoffs may continue

Much has been said about layoffs in the sector. Suncor, Cenovus and MEG all have smaller head counts than two years ago, something that may well continue.

For example, Suncor is moving toward the exclusive use of autonomous (self-driving) hauling trucks at its mining operations.

But other efficiencies are also in the works. In an investor presentation, Cenovus outlined how it was bringing costs down by reducing the footprint and the amount of steel used in its well construction at its thermal operations.

How low do costs have to go?

Although Cenovus lost money in the previous quarter, when the price of oil was lower than it is now, the company said that it's in decent shape with oil trading at current levels of around $50 US a barrel.

"With the significant improvements we've made in our cost structures, we forecast that we can cover all of our operating and capital costs as well as our dividend with a West Texas Intermediate price in the US $45 to $50 range," chief executive Brian Ferguson said in a statement.

But that does raise the question of how low costs need to go before there is new investment in the oilsands.

"The improvement of the financial positions of these companies is great — it's great for employment, it gives us more stability, maybe it'll stop the layoffs going on," said Birn.

"The other side is, when do we get reinvestment and what does it look like?"

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