Energy & Environment http://www.nytimes.com/pages/business/energy-environment/index.html

FEB. 2, 2015 Lower Oil Prices Strike at Heart of Canada’s Oil Sands Production

By IAN AUSTEN http://topics.nytimes.com/top/reference/timestopics/people/a/ian_austen/index.html

OTTAWA — For as long as 400-ton dump trucks have been rumbling around the open pit mines of Canada http://topics.nytimes.com/top/news/international/countriesandterritories/canada/index.html?inline=nyt-geo’s oil sands http://topics.nytimes.com/top/reference/timestopics/subjects/o/oil_petroleum_and_gasoline/oil_sands/index.html?inline=nyt-classifier, crews from Kal Tire have been on hand to replace and repair their $70,000, 13-foot diameter tires.

But the relationship, going back over a decade, didn’t spare the company when oil http://topics.nytimes.com/top/news/business/energy-environment/oil-petroleum-and-gasoline/index.html?inline=nyt-classifier prices began plummeting.

Dan Allan, the senior vice president of Kal’s mining tire unit, said that customers immediately began looking for price concessions. Others asked Kal to withdraw personnel from some sites or swiftly canceled plans to add more maintenance crews.

“We’re sort of caught at the sharp end of the spear,” said Mr. Allan, who is now looking to relocate some employees. “It’s really difficult.”

Canada’s oil sands http://topics.nytimes.com/top/reference/timestopics/subjects/o/oil_petroleum_and_gasoline/oil_sands/index.html?inline=nyt-classifier — and the 167 billion barrels of reserves — prompted an unprecedented expansion over the last decade. But the roughly $155 billion spending spree left the industry with unusually high production costs.

Now, oil sands operators are scrambling to limit the damage, as crude prices hover near seven-year lows http://www.nytimes.com/2015/01/13/business/energy-environment/oil-prices.html . Photo An oil sands operation near Fort McMurray, Alberta, last September. Production costs are high in the oil sands, and low oil prices are a threat to profitability. Credit Todd Korol/Reuters

Suncor, the largest oil sands operator, announced plans to eliminate about 1,000 contract jobs. Shell Canada said it would cut its oil sands work force by about 10 percent. Cenovus Energy said that it would reduce investment spending by 27 percent, and set aside plans for two oil sands project expansions.

A camp for workers in Northern Alberta, the heart of the oil sands, was permanently closed and another was temporarily shut. Several proposed oil sands projects and expansions are under review or have been deferred.

The cuts, though, won’t necessarily translate into lower production. Oil sands production is expected to increase by 25 percent, to 4.8 million barrels a day, according to January estimates by the Canadian Association of Petroleum Producers, partly because of new projects moving into production.

The enormous projects are just too difficult to switch off, and the companies must keep pumping crude to cover the sizable debt on their multibillion-dollar investments. They also don’t want to cede market share to producers in other countries.

Imperial Oil, which is controlled by Exxon Mobil, said on Monday that fourth-quarter earnings dropped by 36 percent. Even so, the company plans to start production at two new oil sands projects this year.

“It really makes no economic sense to bring down production at this point because most of the costs are sunk,” said Stewart Glickman, an energy equity analyst with S&P Capital IQ Equity.

While production may keep humming along, the big question is whether oil sands producers can break even at current prices.

An oil sands project takes five to 10 years to design and build, and they have a life span of 25 to 50 years. Fort Hills, a project now under construction in a partnership led by Suncor, has a budget of 13.5 billion Canadian dollars (about $10.7 billion).

Once such projects are up and running, the expenses are significant, given the process needed to get the oil http://topics.nytimes.com/top/news/business/energy-environment/oil-petroleum-and-gasoline/index.html?inline=nyt-classifier-laden bitumen from the ground. It must either be dug up or blasted from under the ground using steam. Two energy-hungry steps are then needed to separate the bitumen from the sand and to turn it into usable oil known as synthetic crude.

A frequently cited study http://keystonepipeline-xl.state.gov/documents/organization/221135.pdf prepared for the United States State Department’s review of the Keystone XL http://topics.nytimes.com/top/reference/timestopics/subjects/k/keystone_pipeline/index.html?inline=nyt-classifier pipeline estimated that many oil sands projects become unprofitable at prices of $65 to $75 a barrel. Prices are now below $50.

But the State Department review, which was released in January 2014, doesn’t necessarily account for the changing environment.

Andrew Leach, an economist and professor of energy policy at the University of Alberta, said that the American figure inflated the break-even point by including a 12 percent profit margin for oil producers. The drop in the Canadian dollar has also provided an added cushion for domestic oil companies that are paid for their products in the now more valuable American currency.

When those factors are combined, Mr. Leach said, “you’re looking at a reduction of the growth rate at current prices, a stall.” He estimates that the production cost for synthetic crude from the major open pit mine projects is $31 to $39 a barrel, at current exchange rates. He added, though, that a few projects with production problems had much higher costs.

The industry thinking, he said, is, “I’m willing to burn through cash on this project because in the long term it will be worth it.”

As a result, most oil sands operators are reviewing future projects rather than considering production cuts or stopping projects already under construction. They are also looking to cut costs as swiftly as possible.

“Nobody in the oil industry feels very secure,” said Ken Smith, president of the Unifor union local that represents about 3,600 Suncor employees who operate the giant dump trucks and excavators. “We’re kind of at the mercy of these big players like the Saudis and Russia.”

Mr. Smith said he believed that none of Suncor’s 1,000 layoffs would involve his members. Sneh Seetal, a spokeswoman for Suncor, said the company had yet to determine the specifics, but noted that it would involve a mix of contract positions and employees spread across the company’s domestic operations, which include refining and gasoline retailing.

Companies in supporting roles — such as suppliers for safety boots and cleaning services — are feeling the most immediate squeeze. Photo A Suncor oil sands mining operation near Fort McMurray, Alberta. Such enormous projects are difficult to switch off. Credit Todd Korol/Reuters

The Fort McMurray branch of Finning International, a Caterpillar dealer that sold many of the $5 million to $6 million heavy-haul dump trucks, recently laid off about 60 workers. At the end of December, Civeo http://www.civeo.com, which is based in Houston, said it was mothballing an oil sands work housing complex with 2,005 rooms and was permanently closing another with 510.

Trevor Haynes, the president and chief executive of the Black Diamond Group http://www.blackdiamondlimited.com/main/index, another supplier of work housing based in Calgary, Alberta, said he was not yet being pressured to cut rates by oil companies and did not expect to have to close any of the housing in the oil sands. But that does not mean that he is sanguine.

“It comes down to one word, which is ‘uncertainty,’ ” Mr. Haynes said. “Those of us who have been around awhile have seen these periods before, so it feels familiar, if vaguely disconcerting.” Continue reading the main story http://www.nytimes.com/2015/02/03/business/energy-environment/lower-oil-prices-strike-at-heart-of-oil-sands-production.html?rref=homepage&module=Ribbon&version=origin®ion=Header&action=click&contentCollection=Home%20Page&pgtype=article#story-continues-7 Continue reading the main story http://www.nytimes.com/2015/02/03/business/energy-environment/lower-oil-prices-strike-at-heart-of-oil-sands-production.html?rref=homepage&module=Ribbon&version=origin®ion=Header&action=click&contentCollection=Home%20Page&pgtype=article#story-continues-7 Continue reading the main story http://www.nytimes.com/2015/02/03/business/energy-environment/lower-oil-prices-strike-at-heart-of-oil-sands-production.html?rref=homepage&module=Ribbon&version=origin®ion=Header&action=click&contentCollection=Home%20Page&pgtype=article#story-continues-7

His main concern is that new construction projects may be indefinitely postponed. If so, he plans to fill the void by supplying housing to proposed liquefied natural gas http://topics.nytimes.com/top/news/business/energy-environment/natural-gas/index.html?inline=nyt-classifier plants in British Columbia as well as that province’s recently announced plan to build a major hydroelectric http://topics.nytimes.com/top/reference/timestopics/subjects/h/hydroelectric_power/index.html?inline=nyt-classifier dam.

Not everyone is upset or worried about the slowdown in the oil sands. Melissa Blake, the mayor of the regional municipality of Wood Buffalo, which includes Fort McMurray and most of the major oil sands sites, said she welcomed it. After trying to keep up with a population increase of more than 125 percent since 2000, Ms. Blake said, Fort McMurray needs a break.

“The past few years have been just been catching up with the growth we’ve had,” the mayor said. “There’s a bit of an advantage from having a less robust industry.”

A break, Ms. Blake, said should allow the community’s infrastructure to finally catch up with its growth.

Ms. Blake said she had seen no obvious signs of a slowdown around town, like emptier stores and restaurants. But that, she said, is probably because most of the 79,000 full-time residents of Fort McMurray are in less vulnerable jobs. That’s probably not the case, she acknowledged, for about 39,000 people who fly in to work on oil sands projects but make their homes elsewhere, often on the other side of Canada.

But Ms. Blake acknowledged that if the slump in prices proved to be sustained, few would escape its effects.

“There’s going to have to be a real battening down of the hatches,” she said.