Oil sands producers prime the pump for pending boom

Two leading Canadian energy companies last week made more bold, strategic changes in favour of core oil sands operations as new federal energy policy becomes clearer. The asset shuffle comes in anticipation of a potential increase in upstream development to a level not seen for over a decade, with operators focused more on long-term legislative support than current high oil prices.

Cenovus Energy signed a C$5.7bn ($4bn) deal to acquire smaller rival Athabasca Oil, less than two years after swallowing MEG Energy for C$8.6bn. The deal is "strategically sound", even though Cenovus is paying full value and it may not provide immediate gratification for investors, bank RBC Capital Markets says. "Athabasca is like an oil sands unicorn — one of the last remaining (mostly) pure-play public oil sands producers," it says. "Cenovus recognises this scarcity."

Athabasca brings 40,000 b/d of production, but more importantly it offers over 75 years of oil reserves near existing Cenovus assets. The buyer says it could nearly triple Athabasca's output to 115,000 b/d by 2032, which is also the earliest that Canada's planned 1mn b/d Pacific Link pipeline to the west coast could enter service. Included in future plans is Athabasca's undeveloped Corner asset, which could become the first greenfield oil sands project to be realised since 2013.

Suncor Energy, meanwhile, has cashed out of some interests offshore Atlantic Canada for C$1.2bn to UK independent Ithaca Energy, as it restructures its balance sheet to focus on oil sands operations. Suncor has regulatory approval to produce 160,000 b/d of bitumen at its proposed Lewis project near Fort McMurray, Alberta. The company this year also applied to increase the capacity of its Firebag steam-assisted gravity drainage project to 700,000 b/d from 331,500 b/d.

The strategic moves by Cenovus and Suncor come just days after Canadian prime minister Mark Carney deemed Pacific Link a project of national interest, ensuring its application receives fast-track treatment by the federal Major Projects Office. Giving Alberta's energy industry further reason for optimism is pending legislation such as the Building Canada Strong Act, or Bill C-39. This will overhaul the federal regulatory process, and in turn give prospective project developers more certainty and a sign Ottawa is listening. And Canada's proposed Productivity Mega Deduction — which would allow firms to immediately depreciate spending on large capital projects — has drawn plaudits from the industry.

Pieces falling into place

These pending changes to the federal fiscal framework for oil sands operators are "not immaterial", Cenovus chief executive Jon McKenzie said while announcing the Athabasca deal. He also expects to soon see new growth incentives relating to Alberta's royalty structure. "All of that fits together to draw capital back into the resource... and probably accelerate growth," McKenzie said.

Enbridge, Canada's largest pipeline company, also gave Ottawa credit for encouraging private-sector investment by lightening the regulatory burdens his industry has endured for years. "These reforms send an important signal: Canada is now serious about getting projects built again," chief executive Greg Ebel said. Enbridge sank $600mn into the proposed Northern Gateway pipeline before Ottawa ultimately rejected it in 2016. Carney said his government is now signalling its interest in major projects earlier, so investors have more clarity.

The Alberta Energy Regulator sees a steady climb in the province's capital expenditure over the next decade to C$40.9bn by 2035, up by 29pc from C$31.8bn in 2025 — the latter already a 10-year high. Like their US counterparts, oil sands operators remain cautious with their capital expenditure, despite this year's higher profits and cash flow, according to a Deloitte report released on 8 October.

By Brett Holmes