The outlook for oilsands investment - flash-frozen by the global economic crisis in 2008-09 - heated up during 2010 but the thawing was uneven to say the least.

While higher oil prices and relatively narrow heavy/light oil price differentials improved short-term economics, a decision by Canadian Natural Resources' to split up its Horizon Phase 2 mine and upgrader into several projects and the withdrawal of Shell Canada's application for 400,000 barrels per day of upgrading capacity showed good times had not entirely returned.

Further muddying the waters was an announcement just weeks ago by Suncor Energy and French giant Total to combine to build two oilsands mines and an upgrader worth more than $20 billion over the next several years.

Meanwhile, the number of in situ or thermal projects continued to multiply as foreign investors lined up to inject dollars.

Phil Skolnick, a research analyst for Canacord Genuity in New York, said he expects to see more of the same this year, provided oil prices stay strong.

"I think you're going to see continued mergers and acquisitions, probably more on the joint venture side, but there's always the possibility of corporate transactions because there are still a few of those smaller companies remaining," he said.

During 2010, Statoil got $2.3 billion from Thailand's PTT Exploration and Production for its Kai Kos Dehseh thermal oilsands project; Penn West Energy Trust sold a 45 per cent stake in its Peace River oilsands project to China Investment Corp. for $801 million; and Sinopec Corp. bought ConocoPhillips' 9.03 per cent stake in Syncrude Canada for $4.65 billion.

"We're still waiting for India to make a major move and they may be feeling the pressure given that we've seen Thailand and China doing all they've done. And Korea could make a few more steps," said Skolnick.

Analyst Lanny Pendill of Edward Jones in St. Louis said the mood among oilsands companies is determined but cautious, with cost inflation the biggest fear.

"The trend definitely right now is no upgraders," he said. "It's in situ to the extent you have that as an option, versus mining. And it's definitely the smaller expansions relative to the very large expansions seen in the past."

He said there will be big increases in oilsands volume this year as several projects ramp up or come on stream. Meanwhile, engineers will be kept busy planning expansions.

"I think most companies have pursued or are pursuing these smaller incremental expansions versus going with the 100,000-barrel-plus-per day type expansion," said Pendill. "They are approaching the contracting a little differently from the labour standpoint ... because everybody is getting a concerned again that we could see inflation heat up in the oilsands."

Investors are becoming more discerning as the oilsands business matures, says Bob Dunbar, president of oilsands consulting firm Strategy West.

Ten years ago, big mining projects were the only game in town - now there are choices not only between mining and in situ but sophisticated money is also seeking out the projects with the best reservoir quality.

What they are finding is that in situ technologies, through which 80 per cent of the oilsands will be accessed, are gaining an economic advantage.

Capital intensity, for example, at Imperial Oil's under-construction Kearl mine project is about $70,000 per flowing barrel - it'll cost about $8 billion for a project expected to produce 110,000 barrels of bitumen per day.

Suncor has said its oilsands mines will cost around $60,000 per barrel to build while its multiple Firebag thermal in situ projects will come in for between $30,000 and $35,000 per barrel.

"People like Cenovus are saying that, in some cases, they can add in situ capacity at about $20,000 per daily barrel," Dunbar said.

In early December, Canadian Natural announced it had broken down its Horizon expansion plan to five main components and thrown out set timelines to keep a tight rein on costs while bringing overall production up to 250,000 bpd.

It plans to spend between $800 million and $1.2 billion next year on Horizon while maintaining flat production, and vowed to cap spending on the project at $2.5 billion a year, as well as keeping the labour force at a 5,500-person maximum.

Suncor says it will allow a maximum 4,000 people on each mine site as it builds its Fort Hills and Joslyn projects in order to avoid cost inflation.

Meanwhile, Cenovus Energy plans to spend about $2.4 billion in 2011 as it moves ahead with manufacturing-style expansion of its steam-assisted gravity drainage or SAGD thermal oilsands projects.

The oilsands rely on technology and the success of the next big play - capturing bitumen trapped in carbonate or rock formations - will depend on how technology tests pan out this year and beyond.

Of the estimated 1.8 trillion barrels of total bitumen resource-in-place in Alberta, roughly 536 billion barrels are attributed to carbonate formations, according to the Alberta Energy Resources Conservation Board.

At 406 billion barrels, the Grosmont formation of northern Alberta is the largest carbonate reservoir - if it can be successfully developed, Canada's oil reserves could surpass those of Saudi Arabia.

Private companies Laricina Energy and Osum Oil Sands are now building the 1,800-bpd Saleski project, the first to tap the Grosmont west of Fort McMurray. State-owned Korea Investment Corp. invested in both companies earlier this year. Steaming started at the project last week.

Meanwhile, Alberta regulators approved Athabasca Oil Sands' application for a two-well thermal-assisted gravity drainage or TAGD winter test in its Dover West project's Leduc carbonate reef. The technology uses electrical heating to produce bitumen.

It will also perform a one-well steam injection test.


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