Summary
While larger oil sands players like Exxon Mobil Corp and Royal Dutch Shell aren't likely to see any cost savings by acquiring rivals, there may be benefits for smaller players. Thus the Suncor Energy's deal to buy rival Petro-Canada may set in a wave of such buyouts or mergers for consolidation hoping for cost savings and a stronger balance sheet for seeking financing and independence, as Suncor is targeting.
Analysis
Compared to the oil field development say in Tupi, under the salt basins of Santos off the brazilian coast, the world's largest oil find in the western hemisphere, the production cost per barrel from the Canadian oil sands as per experts and company news reports from Royal Dutch Shell etc, will be more than double to the barrel of oil, surpassing 38 $ per barrel especially with the mandatory Underground Carbon Dioxide Storage.
Oil Sands are deposits of bitumen, a molasses-like viscous oil that will not flow unless heated or diluted with lighter hydrocarbons. For every barrel of synthetic oil produced in Alberta, more than 80 kg of greenhouse gases are released. The process is known as SAGD (Steam Assisted Gravity Drainage) process. Basically, a company uses natural gas-powered plants to generate steam to heat up the bitumen concurrently producing the dangerous Carbon Dioxide which have to be stored underground.
They are contained in three major areas beneath 140,200* square kilometers of northeastern Alberta - an area larger than the state of Florida, an area twice the size of New Brunswick, more than four and half times the size of Vancouver Island, and 26 times larger than Prince Edward Island. However, only about two per cent of the initial established resource has been produced to date.
Analysis of the 70 odd projects in Alberta currently under development, but put on cold storage due to the low oil prices, indicates cost ranging from 39$ to as high as 60$ per barrel. Shell for its Athabasca project had indicated a cost of 11 billion dollars for a production level of 10000 barrels a day. The projected costs for development of the 70 projects is around 110 billion dollars alone.
Output of marketable oil sands production increased to 1.126 million barrels per day (bbl/d) in 2006. With anticipated growth, Canadian oil sands production would grow from 1.2 million barrels per day (190,000 m³/d) in 2008 to 3.3 million barrels per day (520,000 m³/d) in 2020.
Therefore the statistics of the Suncor Petro-Canada deal, indicates that with this deal the combine becomes the largest Canadian company to take on the mega development costs of the oil sands which is believed to contain the world's largest oil reserve after middle east.
The Fort Hills block of oil sands leases contains more than four billion barrels of recoverable bitumen resource. A final investment decision on the mining portion of the project was to be made by Petro-Canada Oil Sands Inc. and its Fort Hills partners sometime in 2009. The project's associated synthetic crude oil production is estimated at 140,000 b/d.
The combine may now be in a position to restart the mothballed C90 billion dollars Fort Hills Mines Project of Petro-Canada, owing to not only stronger balance sheet, but also the consequent cost saving arising out of avoiding cost overlaps and curtailing the list of projects which both have hitherto been following.
The pace of acquisitions in the Canadian Oil sands industry has been slow, though many have earlier anticipated large scale consolidation amongst the 50 odd oil firms operating in the area. primarily for the reasons cited above. There are indications of of one other deal being on the books.
This is the Total SA for UTS Energy Corp's 20 percent stake in the Fort Hills Project. This deal is now more than is likely to be done because the costs in the fort Hill Project is expected to fall now.
Royal Dutch Shell Plc, Europe's largest oil producer, which had postponed an investment decision on expanding its Athabasca oil-sands project in Canada because of rising costs, or for that matter Exxon Mobil Corp, may however not need this kind of consolidation.
However as per analysts, smaller firms like the Canadian Natural Resources Ltd and Nexen Inc who have had to put off projects in the oil sands after oil prices sank, mergers may be an attractive option to help in reducing costs, improve balance sheets, and protect their independence.
