E-mail this article Printer-Friendly

What the world needs now is Canada’s oil sands

Demand for energy and the high price of crude spells prosperity for the oil sands and three Canadian companies, says this analyst.

Debate about the oil sands rages on among energy firms, economists, stock market analysts, environmental groups, political pundits, newspaper columnists, and the cab drivers in Fort McMurray.

Where does this leave investors? Are the oil sands too expensive and messy to exploit? Or is the world’s demand for oil simply too great to let this enormous resource lie dormant?

Not long ago, we presented the views of a U.S. advisory which was enthusiastic about the potential of the oil sands, but felt that concerns over environment and expense would put the project on hold. The reluctant verdict: sell the big companies whose business it was to extract the oil from the sands.

Today we bring you the opposite view, as espoused by Mr. Grant Campbell in Investor’s Digest of Canada.

A simple premise: supply and demand

Mr. Campbell begins his story with a development that has baffled many observers. Against a flurry of predictions to the contrary, the price of crude oil has remained high.

“The increased political turmoil in many of the oil producing regions has supported higher prices based on concerns about supply disruptions. Supply concerns have been compounded by increases in demand which have not been deterred by higher prices.”
Nothing in economics is more simple than this basic premise: supply and demand. But there’s more to the story.

Millions of new consumers

“The increase in global demand has been fuelled in large part by the robust economic growth in Asia.” And more and more Asians are taking part in this growth. “The driving force has been and will continue to be the transformation of China from an agricultural to an industrial society.”

This means more middle-class consumers; not thousands more, but millions. “The potential of millions of new consumers is going to stretch global resources well beyond what we are seeing today,” says Mr. Campbell. And oil prices will rise as demand outstrips supply.

“In a few years we will all look back on US$65-a-barrel oil as the good old days of cheap energy.” (Don’t even think about what that will mean at the pumps; we’ll climb that hill when we come to it.)

The real problem for a world ravenous for more energy is that when new oil fields are discovered, they are smaller than the ones already in operation.

This is Canada’s opening. The Alberta oil sands are one of the last great energy reserves on earth. And, adds Mr. Campbell: “In addition to the size of the reserve this country’s political stability puts Canadian companies in a very attractive position.”

It is Mr. Campbell’s view that instability will increase in other oil-rich countries such as Venezuela, and drive even more investment toward Canada.

Higher prices, three winners

And here’s the topper: the move up in crude oil prices, asserts the analyst, means that the oil sands can be processed economically. The development of new technology will improve the whole process and increase profitability. And will do so for quite a while: most estimates put the reserves in the oil sands at 178 billion barrels of oil. Give or take a few hundred thousand.

Three companies stand be the winners in this global rush for oil. Suncor Energy (TSX-SU) is now celebrating its 40th year in the Athabaska region, and its persistence is paying off. It will pay off even more in the future, says Mr. Campbell. Suncor is expanding its production facilities with a view to producing 500,000 barrels of oil a day. Its refineries in Sarnia, Ontario and Denver feed Sunoco service stations in Canada and Phillips 66 stations in Colorado.

“Suncor is very well positioned for growth over the long term and should be valued at a premium to other similar companies due to the massive reserves located in a politically stable region.”

Western Oil Sands (TSX-WTO) holds a 20 per cent interest in the Athabasca Oil Sands Project (Shell has 60 and Chevron 20 per cent). That project produces 155,000 barrels of oil per day (b/d), which should increase to 200,000 by the end of 2009. Western also has a 20 per cent stake in Chevron’s Ellis River project which holds an estimated 7.5 billion barrels worth of oil.

This is an in-situ property; the bitumen that will be converted into crude is liquefied by steam and then pumped out of the ground. This technology “is less invasive and leaves a smaller environmental footprint to the operation.”

Not least is one of Canada’s largest income trusts, Canadian Oil Sands Trust (TSX-COS.UN). It owns 36.7 per cent of the Syncrude project (along with six other companies). Seems like only yesterday, but the project produced its first oil almost 30 years ago. Now producing 100,000 b/d, it plans to hit 350,000 b/d and, by 2016, 500,000 b/d — a level it expects to sustain for up to 50 years!

50 years is a long time to buy and hold. But if Mr. Campbell is right, the profits will start a lot sooner than that. He concludes his story in Investor’s Digest: “The world will be willing to pay a premium for access to these long-life assets as supply from other areas becomes less certain.”

Will Canada become the centre of the world’s attention? Can Canadians accept success? Can they be comfortable with big profits? Stay tuned.