The Success of Canada's Big Oil Sands Bet is Heavily Dependent on Innovation
August 2017 - Late 2014 marked the beginning of a long nightmare for many participants in the oil and gas industry. In the years leading up to the oil price crash, advancements in horizontal drilling and completion technologies made it possible to economically exploit large volumes of light oil from shale reservoirs previously thought to be unfeasible, particularly in the United States. This sudden growth in supply, coupled with a strengthening dollar and a slowing global demand for crude, ultimately set the stage for a dramatic price collapse where the WTI spot price fell from highs of $110/bbl to a bottom of nearly $26/bbl.
While pundits continue to speculate as to when global crude demand will surge to stabilize the market, it is clear that commodity traders are paying close attention to the supply side. It is not uncommon for the EIA’s weekly inventory report’s results to drive price fluctuations in either direction nor is it surprising to observe knee-jerk reactions when OPEC makes a periodic announcement. One thing is for sure though – short-term in commodity price volatility is a reality that we must live with.
The events that precipitated over the last few years have forced oil and gas companies around the world to rethink their strategies. Overleveraged companies have frequently filed for bankruptcy and many companies have deployed drastic cost-cutting measures to preserve capital and protect their balance sheets. As well, numerous multinational oil companies, such as Royal Dutch Shell, Marathon Oil, and ConocoPhillips, have exited Canada by divesting their interests, leaving Canadian energy companies with the opportunity to gain greater exposure to oil sands assets.
By capitalizing on operational efficiency, banking on an eventual crude oil price recovery, and embracing innovation, Canadian oil sands producers are hoping that their big oil sands bets will pay off.
Capitalizing on operational efficiency is the clear low-hanging fruit. In some cases, a Canadian company may buy-out a joint venture partner's share of a project, allowing for immediate cost savings that can be realized by decreasing overhead. In other cases, a Canadian company may simply be able to better operate the asset than a previous owner, either through a better understanding of how best to exploit the asset, or being able to operate the asset with a lower cost of production. The effects of these efficiencies are typically fully realized within one year of acquisition.
Banking on an eventual crude oil price recovery is dependent on the operator’s macro-economic outlook and being right about it. While the pricing factor is largely beyond the company’s control, the degree to which innovation is embraced can be controlled and will set the trajectory of Canada’s big oil sands bet. Actualizing success will require thinking outside the box and challenging the status quo to make changes in how business is traditionally conducted. The pace of innovating and adapting innovative technologies is completely within the oil and gas industry’s control – but how fast does the industry want to adapt?
Much like how horizontal drilling and completions technologies spurred the shale oil boom and caused global disruptions from the supply side, a similar revolution can and must occur in oil sands. This may take the form of technological innovation where companies discover ways to more efficiently produce or process crude. This may also take the form of rethinking how to approach relationships within the industry, with government, and with civil society. Whatever lies ahead, it is our hope that the oil and gas industry adapts an approach that not only makes economic sense but is also environmentally and socially acceptable.
About Well Resources
Well Resources is an Alberta-based technology company with local offices in Calgary and Edmonton. Its areas of focus are in the energy and life sciences sectors, where Well Resources develops and licenses green technologies that promote effective resource utilization.