As one of the largest proposals in Alberta oilpatch history takes a big step toward reality, industry experts say the province's bitumen-rich oilsands can accommodate even more mega-project developments.
But pipeline constraints, which could leave companies without a means of shipping the crude to market, and possible labour shortages that could lead to construction delays, are two factors analysts say could gum up the works.
Suncor Inc. announced last week that it intends to push ahead with the $10-billion Voyageur project, and filed with the Alberta Energy and Utilities Board (EUB) plans to build a new $6-billion upgrader, to be constructed close to its existing upgrader facilities near Fort McMurray. The company also plans to spend $4 billion for additional oilsands production, both mined and in situ. It has yet to apply for that part of the project.
"It's a good move by Suncor," says Brad Anderson, executive director of the Edmonton-based Alberta Chamber of Resources (ACR). "There's an appetite for that kind of production. Worldwide, the population is growing and the increased demand for energy is there, and the oilsands is one of the solutions."
A decision by regulators on the Voyageur project is expected to take two years and construction is not expected to begin until 2007.
Production from the new facility should be brought on line in phases, starting in 2010 with full capacity of approximately 550,000 barrels per day (b/d) targeted in 2012. Suncor currently produces 225,000 b/d of synthetic crude.
Voyageur is just one of a handful of multibillion-dollar projects planned for the oilsands. According to Alberta Economic Development records, 22 individual companies or joint ventures are vying for 46 oilsands projects - either proposed, approved or already under construction - in the province, for a value of $65 billion, or roughly two-thirds the total value of economic projects proposed for any sector in Alberta.
In recent years, oil producers have rushed to snap up most of the remaining oilsands leases in northeast Alberta. The EUB puts remaining established reserves for bitumen at 174 billion barrels, compared to 1.6 billion barrels of conventional crude oil.
The Canadian Association of Petroleum Producers (CAPP) says that at current output levels of just a little more than one million b/d, the sands could continue producing until the year 2400. Increasing that production to 2.6 million b/d - which is anticipated by 2015 - would still mean about two centuries worth of heavy-oil resource, says Greg Stringham, CAPP vice-president of markets and fiscal policy.
That means the dozens of oilsands projects currently being proposed could go ahead, especially given the world's growing thirst for oil.
But challenges remain.
Stringham says CAPP is "doing some intense analysis" on what it will take to move the hundreds of thousands of barrels of additional crude to market. He warns that to avoid transportation bottlenecks, pipeliners must take action now - because it can take up to five years to get through regulatory approvals and the construction phase before a new line is in the ground.
"You want to make sure you get the process going well in advance so you're not sitting there saying 'Guess what: I have oil but no capacity,' " he says.
"Will all (proposed pipelines) get built? Not all at the same time, but if this continues to grow over the next decade we're going to need at least one, if not two or three major to significant pipelines out of the basin."
Enbridge Inc., TransCanada Corp. and Terasen Inc. are all proposing pipelines to carry oil to the coast.
Steven Paget, an analyst with First Energy Capital Corp., agrees that pipeline capacity, especially to the Pacific Coast where ships can carry it to Asian markets, must be developed to access the growing world demand and drive the oilsands projects currently on the books.
Still, he believes Alberta's heavy-oil resources hold immense potential and that Voyageur, Canadian Natural Resources Ltd.'s Horizon project and especially the Nexen Inc.-Opti Canada Inc. Long Lake project represent important initial strides in the oilsands' commercial development.
"These (projects) are the next steps in getting things going," Paget says. "For a long, long time, of course, we had two mines and we had a couple of in situ projects.
"Now there are three mines and a fourth on the way, and the first in situ upgraded bitumen," at Long Lake, which he calls a "major milestone.”
In situ bitumen accounts for about two-thirds of estimated reserves, Paget adds.
The Alberta chamber's Anderson says the Voyageur announcement, along with other projects, merely confirms that oilsands development is going according to plan.
"The first wave was (the start of oilsands operations by) Syncrude, Suncor, Imperial going back about 30 years ago. So now we're on the second wave and what lies ahead is the third wave," Anderson says.
He says the industry is now poised for a third wave of development that could see production increasing to five million b/d, or 16 per cent of North American demand, by 2030.
The ACR predicts this increased production could generate an additional $40 billion of economic growth in Canada, create tens of thousands of new jobs across the country and produce up to $90 billion in new investment over the next 30 years.
Randy Ollenberger, a Calgary-based analyst with BMO Nesbitt Burns, says he is bullish on Voyageur and other oilsands ventures that contemplate upgrading capacity, which he considers key for success for any heavy-oil projects.
He says companies should avoid being a "naked" heavy-oil producer, not being in a position where they are looking to market a lower-valued product.
"The resource is there ... and as far as the market for that crude, as long as you're selling synthetic oil, which is a lighter product, the market is there, too," Ollenberger says. "If you're selling a heavier product ... then you have to be concerned whether or not the market is there."
Global crude oil demand in 2003 was about 80 million b/d, and many estimates predict it could reach more than 84 million by the end of this year, driven largely by the increased thirst for oil in China and India.
Suncor says it wants to be in a position to capture part of that market, and is designing the Voyageur project to weather fluctuations in pricing.
The company has targeted a modest 15-per-cent return on capital investment based on oil priced at $28 US per barrel. Recent oil prices hover between $50-60 per barrel.
To keep a lid on capital costs, Suncor says Voyageur will take a staged approach to growth: The upgrader will be subdivided into several components for planning and construction purposes, with no project component exceeding $1 billion to allow better control of budgets and schedules.
"There are a lot of things outside our control, whether it be exchange rates, oil prices and ... materials, and even labour," says Suncor spokesman Brad Bellows.
"We're really focused on what we can control: Tight capital-cost management from inside the company and good execution."
Bellows says drawing from a variety of available workforces - Canadian labourers will be given preference over foreign workers - and building long-term relationships with "suppliers of choice" will help keep costs under control.
However, the much- discussed tight supply of tradespeople in the province is a factor that could cause construction slowdowns in Suncor's and other oilsands projects, CAPP's Stringham says.
He adds that based on past experience, providing no more than three mega-projects enter their peak building phase simultaneously, the labour pool ought to be deep enough for all.
"With two multibillion- dollar projects and one minor one of no more than ... $1 billion, the Alberta economy has proven it can handle that," Stringham says.
(John Ludwick can be reached at ludwick@businessedge.ca)
