Keeping the oil sands competitive

CERI’s Dinara Millington discusses how the oil sands can stay competitive in a lower-price, lower-carbon world

Dinara Millington is an economist and the vice president of research at the Canadian Energy Research Institute (CERI). Context recently spoke to her to get her thoughts on key issues and opportunities affecting the competitiveness of the oil sands industry.

Q: What do you see as key threats to the competitiveness of Canada’s oil sands?

A: Canada is competing in the global market for capital. The industry is located in a higher cost basin. So a major competitiveness issue for the oil sands is costs — what can producers do to lower their operating and capital costs so they’re able to compete, especially with tight oil and other conventional players around the world.

Dinara Millington, vice-president of CERI, says innovation the key to industry competitiveness. Photo by Jason Dziver.

The second issue has more to do with our geographical location and what Canada can do to accommodate incremental growth in the oil sands through new export infrastructure. Currently about 97 per cent of total Canadian oil production, net of domestic refinery demand, is exported to the U.S. But today, the U.S. market is largely saturated. It’s not going to grow. Where there still lies global oil growth is in Asia. India, for example, is building the largest crude oil refinery in the world (the Jamnagar refinery in the state of Gujarat), and China is building new refinery capacity to import heavier crudes. Canada needs to figure out a way to get our product to those markets if we want to grow our oil sands industry.

Q: In a recent paper on oil sands supply costs, CERI has commented that the industry is going to have operate longer in a lower price environment.

A: That’s right. The Western Texas Intermediate (WTI) price for oil is now in the US$40 to $50 a barrel band, which is close to the average mean price of crude oil (US$51.40 a barrel) from 1974 to 2015. So we’ve actually seen crude prices return to their old range. I don’t think we are going see US$100 a barrel oil any time soon unless there’s some major supply disruption through geopolitical events. So, given that oil sands projects are 20- to 30-year projects, companies will have to figure out how to be competitive long term at the lower price band. This will mean that the industry will need to adapt to become leaner, more efficient and more scalable through phased development.

Q: Are you seeing positive signs on the cost front?

A: Yes, industry costs are coming down — more so on the operations side. Supply costs are down 27 per cent for SAGD (steam-assisted gravity drainage) projects and six per cent for mining operations, from 2015 levels. Companies have been able to find operating efficiencies. They’ve also been able to take advantage of external factors like reduced labour costs and cheaper natural gas supply.

Q: CERI has said the costs and emissions challenges facing the oil sands industry are real and serious and, if not urgently addressed, could hurt the growth of the industry. Can you explain?

A: On the emissions side, Alberta’s Climate Change Leadership Plan has placed an absolute emissions cap on the industry of 100 megatonnes of greenhouse gases a year. Currently the industry emits close to 70 megatonnes a year. So there’s really not much room left to grow if the industry does not address its environmental footprint. CERI has estimated the industry will reach this cap by 2028 under a business-as-usual scenario.

The biggest opportunity to address this footprint lies in technological innovation — for example, optimizing the use of natural gas to create steam, enhancing well pad design and addressing the quality of bitumen the industry is able to extract and export. What we’ve shown through our study is that if the industry aggressively pursues and implements different technologies to manage water, natural gas and steam creation, it could actually grow production without growing emissions — even lowering them.

On the cost side, we’ve also found that by adopting new technologies industry does not have to trade one objective for the other — reducing costs versus reducing emissions. It’s actually possible to address both at the same time, whether companies are building brownfield facilities or new projects.

Q: What more needs to be done to support a more competitive oil sands industry?

A: Well, industry can’t sit still. They have to continue innovate to reduce their cost structures and energy intensities to a level that’s equivalent to a conventional barrel or even lower. And industry is moving in the right direction.

It’s just a matter of how fast can we get to these goals of lower costs and emissions. Industry will need to embrace change faster than ever before by de-risking innovative technology. And that will take more collaboration between academia, governments, industry and groups like Canada’s Oil Sands Innovation Alliance.

The world is moving towards a lower carbon economy and the industry needs to go with the world. Creating this transformation is going to require a step change to cleaner, more efficient technologies. It will take some time and money to implement, but it is a step in the right direction. This industry in particular is full of ingenuity, expertise and creativeness. I believe it can get there.

In this article, Context speaks with:
  • Dinara Millington Vice-President Research, Canadian Energy Research Institute