Canada's oil sands hit their stride

Canadian oil sands operators are expected to close out one of their best years on record when fourth-quarter earnings are released, but producers will soon be focused on a pipeline prize anticipated by the end of this year.

Canada's five largest oil sands companies — Canadian Natural Resources, Cenovus, Suncor, Imperial Oil and MEG Energy — combined for record production of 3.2mn b/d of oil equivalent (boe/d) of crude in the first nine months of 2022, while enjoying record-high prices for domestic light and heavy crude benchmarks. They have rewarded shareholders and plan to sink more cash into projects this year. The first nine months saw profits of C$27bn ($20bn), nearly double the C$15bn made during all of 2021, and a substantial swing from the C$19bn in losses in 2020.

Cash has been used for debt repayments and share buy-back programmes, but each company is bumping up its capital budget along with production in 2023. Combined, they intend to pump out 3.5mn boe/d for an increase of 2.4pc year on year, while capital budgets will get a 13pc boost to C$17.2bn (see table).

ExxonMobil subsidiary Imperial is the first to unveil its full-year 2022 results, giving investors an indication of what to expect from its peers, and posting a tripling of profits compared with the year before. Imperial is a 25pc owner in the 350,000 b/d Syncrude project, which saw record production. Looking to this year, Imperial expects benchmark crude WCS differentials to strengthen in 2023, even before the completion of the 590,000 b/d Trans Mountain Expansion (TMX) pipeline connecting Edmonton to the docks in Burnaby, British Columbia.

The project is now more than 75pc complete and is on track to be in service by the end of 2023. It will not only enable Canadian producers to bypass the US when targeting Asian markets, it will provide a quicker route. Vessels loading from Canada's west coast can reach east Asia in about 10 days, less than half of the 25-day voyage from the US Gulf coast. Canadian crude stock levels are creeping higher, and while not as problematic as in the past, volumes required for TMX's linefill could help drain the excess in the later months of 2023.

Expanding interest

The US' largest importer of Canadian crude, Phillips 66, has said internally that it expects TMX's start-up will slip to 2024, but also that the market does not need the line. But an expected return to oil demand growth by China as it ends its zero-Covid policy is already boosting Asia-Pacific crude demand and is likely to reinforce Canadian producers' desire for access to Pacific coast exports. Canada's largest five producers have all made commitments on the expansion project to the Pacific coast, as have BP, Parkland, PetroChina, Marathon Petroleum and TotalEnergies.

The latter will increase its interest in the Fort Hills oil sands project by 6.65pc, taking its overall share in the project to 31.23pc. The remaining 68.77pc of the project will be owned by Suncor, which operates the Fort Hills project, as the two companies bought out Teck Resources. TotalEnergies in 2020 said its Fort Hills assets could become "stranded" within 30 years, and in September 2022 announced it would spin off its Canadian assets as "we are not the best shareholder of these assets because we have a climate strategy".

Imperial and its peers continue to advance carbon capture and storage (CCS) plans to connect up to 20 oil sands facilities, but given the scope, scale and funding, they remain at their infancy stage. Imperial last week noted that fiscal support for CCS in Canada "is lagging", as the US' Inflation Reduction Act has moved the needle for what Canadian companies need to stay competitive. Domestic producers must wait until the federal budget, typically released in the spring, to see if Prime Minister Justin Trudeau's government will sweeten the pot for CCS.

By Brett Holmes