Suncor/Petro-Canada merger unlikely to cure what ails oil sands

by Keith Johnson

Now that consolidation has begun in Canada's oil patch, will that rejuvenate oil-sands production that has been dry-gulched by the financial crisis and cheapish oil prices?
The rationale for the $ 15 bn all-stock merger between Canada's Suncor Energy and Petro-Canada is to save costs and combine forces on expensive new investments at a time when capital is hard to come by and cheaper oil makes extracting unconventional reserves an iffy economic proposition.

But at first glance, it doesn't look like the marriage between two of Canada's biggest oil players will address the fundamental problem in accelerating oil-sands development: It's just too expensive at current crude prices. It also doesn't address the uncertainty around how climate-change legislation might impact the economics of this carbon-heavy fuel.
Suncor said the merger will save the combined company about C$ 1.3 bn per year in operating expenses and greater efficiencies in capital expenditure. Don't count onthat alone to patch the capital shortfall in the tar sands: Suncor alone slashed its 2009 capital expenditure budget by $ 3 bn this year.

The combined company, which would have pro-forma oil sands production of about 288,000 bpd, might not find it much easier to rejuvenate stalled investments in key areas. Suncor's plans to almost double oil sands production by adding a refinery-sized facility called an upgrader, for instance, still look stillborn despite the merger: The Voyageur Upgrader carries a C$ 4.4 bn price tag.
In the end, Canada's oil sands are at the fringe of oil production anyway: The combined company's oil sands production represents less than 10 % of Canada's total crude production, which in turn accounts for only about 4 % of global output. What's important about Canadian production is that it represents a rare potential growth area among non-OPEC countries; places like Mexico, Russia, Norway, and Central Asia are all seeing steady declines in output.

Despite the hopes that strength in numbers might provide a bulwark for the oil sands patch, the best hope for Suncor and Petro-Canada to squeeze new production out of Canada's tar-like bitumen will probably end up being a familiar recipe: Oil prices close to $ 100 a barrel.
And while crude has rallied of late on supply-side flutters and a weak dollar, $ 100 crude seems a long way off in the absence of a sustained economic recovery.