A new study is charting the road to profitability for Alberta’s oilsands mega-projects.

Given the volatility of oil and gas prices over the past decade, investors and industry are now turning to an independent benchmark study that links oil and natural gas prices to project viability.

The study, conducted by the Canadian Energy Research Institute (CERI), predicts a “very robust future” for Alberta’s oilsands industry during the next 13 years – given a “reasonable” outlook for oil prices, which the study defines as $25 US per barrel for West Texas Intermediate.

But CERI’s study also concludes that the industry’s appetite for natural gas – used to generate power and steam during the bitumen-to-crude oil upgrading process – could skyrocket during the next decade, leaving many wondering where the gas will come from to fuel expansions.

“My personal view is that we are entering a period when we might expect to see higher prices,” says Bob Dunbar, CERI’s senior director of research and lead author of the study, released last week.

“I think there’s a much higher likelihood of prices above $25 US than below,” says Dunbar.

The report also presents a reality check for industry and investors, cautioning that supply costs are higher than those previously published by industry.

Citing vagaries in crude oil prices, CERI predicts that while several new oilsands projects will proceed, others will be deferred. Some projects may even fall by the wayside.

The stakes are huge. Alberta’s oilsands – with remaining established reserves of 174 billion barrels of crude bitumen – are second only to Saudi Arabia’s reserves.

In 2003, Alberta’s oilsands industry produced 874,000 barrels per day, or about 35 per cent of Canada’s total oil production.

Based on CERI’s most likely growth scenario, daily production from Alberta’s oilsands could hit 2.2 million barrels of synthetic crude and unprocessed crude bitumen by 2017.

According to CERI, the $25 US threshold provides industry with the certainty of a 10-per-cent rate of return (ROR) on investment. The 10-per-cent ROR also factors in a NYMEX price of $4.25 US per thousand BTU of natural gas.

Wilf Gobert, vice-chairman and oil and gas analyst with Peters & Co. Ltd., describes the 10-per-cent ROR as “a floor rate that industry would look to.”

Gobert says that Canadian Natural Resources Ltd.’s future Horizon Oil Sands Project, an open-pit mine operation, has a 13- to 15-per-cent ROR, based on a $25 US oil price. He says short-term fluctuations in oil prices are unlikely to halt oilsands mega-projects due to long lead times – projects take, on average, two to five years from concept to regulatory approvals to construction.

“In-situ projects are more responsive to price fluctuations,” says Gobert.

In-situ projects, he adds, are reasonably modular, starting out in small production quantities and adding production incrementally. Sitting at depths greater than 75 metres – the economic limit for surface mining – in-situ deposits rely on injecting steam, diluent or solvents downhole to get the viscous, heavy bitumen to flow to wellbores.

However, even with today’s WTI prices hovering around $35 US, most project proponents are basing their investment decisions on conservative prices in the mid $20s.

Suncor Energy Inc. just received approval from the Alberta Energy and Utilities Board for its $1.5-billion Cdn upgrader expansion in Fort McMurray. Suncor plans its projects on a 15-per-cent ROR on capital employed, based on a WTI price of $22 US per barrel. “We are at the conservative end of mid-cycle prices,” says Suncor spokesman Brad Bellows.

The CERI report also notes that development of Alberta’s oilsands will require innovative technological solutions to mitigate risk to capital investment. Once capital expenditures are recouped from the construction of these mega-projects, the Alberta government will skim 25 per cent off the top, per barrel, in the form of Crown royalties – and that potentially represents an annual take of hundreds of billions of dollars.

“Let’s dare to dream for a minute or two,” says Alberta Energy Minister Murray Smith, of the potential windfall to the citizens of Alberta. “We’re starting to see just how important the generic royalties are.”

Production from Alberta’s oilsands projects continues to surge – this year, production has exceeded one million barrels per day of synthetic crude oil and unprocessed crude bitumen.

CERI’s “moderate growth” scenario, based on a WTI price of $25 US per barrel, predicts that daily production will reach 2.2 million barrels by 2017, comprised of 1.3 million barrels of synthetic (or upgraded) crude and 0.9 million barrels of unprocessed crude bitumen. Under this scenario, capital expenditures by industry will average $3.1 billion Cdn per year from 2004 to 2017.

At a WTI price of $32 US – described in the report as a “high growth” scenario – oilsands production would hit 2.8 million barrels per day by 2017, with an average annual investment by industry of $4.4 billion Cdn from 2004 to 2017.

The report also paints a grim picture of a “low-growth” scenario that contemplates a WTI price of $18 US. Given this scenario, projects under construction would be completed, while projects under way would continue. According to CERI’s Dunbar, however, investment dollars for new projects would disappear.

Given CERI’s findings, natural gas consumption for oilsands extraction – currently sitting at just over 0.5 billion cubic feet per day – would climb to 2.2 billion cubic feet in the low case, and 3.7 billion cubic feet per day in the high case.

Dunbar suggests the oilsands industry try to kick the natural gas habit.

“North America is starting to be constrained by natural gas supply,” he says, adding even the proposed Mackenzie Valley pipeline – scheduled to ship one billion cubic feet per day south – will not feed oilsands producers’ growing appetite for natural gas.

Dunbar cites alternative energy sources as the solution to the looming gas crunch. He also advises industry to investigate the use of cost-effective nuclear power for steam generation.

Market forces are driving the implementation of innovative technologies in oilsands projects, says Greg Stringham, vice-president of markets and fiscal policy for CAPP, the Canadian Association of Petroleum Producers.

“Technology is pushing in the areas that it needs to, including the environment,” he says. “And, that has been the story of the oilsands since it started in the mid-1960s.”

CERI’s study also questions the availability of skilled labour, citing this issue as a risk to capital investment. In recent years, capital costs have ballooned during the construction of three mega-projects in Fort McMurray, in large part due to labour shortages.

“There is a need for us to continue to develop the labour pool as we go forward,” says Stringham. He adds that CERI’s findings are consistent with CAPP’s studies on future oilsands supplies. CAPP’s in-house studies, however, only contemplate an eight-year forecast to the year 2010.

Alberta currently boasts 10 per cent of Canada’s labour force and 20 per cent of Canada’s apprentices in various trades. Several initiatives are now under way – at the governmental and industrial level – to prepare Alberta’s workforce to meet the challenges posed by future oilsands mega-projects.

(Susan Eaton is a Calgary-based geologist, geophysicist and freelance writer. She can be reached at s.eaton@businessedge.ca)