OREANDA-NEWS. May 23, 2017. Canada's oil sands producers see economies of scale and reduced unit costs as key to success in a $50/bl oil market, possibly pointing to further consolidation after a recent slew of multi-billion dollar asset deals.

Cenovus Energy's $13.3bn purchase of the bulk of US independent ConocoPhillips' unconventional oil and gas assets in Canada closed on 17 May. Other major Canadian producers such as Suncor Energy, Canadian Natural Resources (CNRL) and Athabasca Oil Sands have also bought oil sands assets through the downturn. A purchase, particularly of producing assets, eases an immediate capital expenditure (capex) pressure on the buyer to sustain or raise output. "In a volatile commodity price environment, economies of scale are important," Cenovus chief executive Brian Ferguson says.

The acquisition will increase Cenovus' 2017 forecast production to 588,000 b/d of oil equivalent (boe/d) from 290,000 boe/d, of which 60pc will be from its oil sands operation. The rise will help to more than offset natural declines in its conventional oil and gas output, which fell by 10pc from a year earlier to 53,000 b/d and by 11pc to 363mn cf/d (3.7bn m?/yr), respectively, in the first quarter. The deal will generate $500mn of free cash flow in 2018 at a WTI crude price of $50/bl and gas prices of $3/'000 cf. Cenovus' 2017 capex target remains at $2bn-$2.2bn, $1bn less than last year, but it needs only $1.5bn-$1.6bn to sustain output. "We have more than doubled our cash flow generation capacity," Ferguson says. "We do not double our capital."

CNRL frames its purchase this year of Shell assets for $5.4bn in cash and $3.1bn of its own shares in a similar light. "In today's commodity price world, long-life, low-decline assets are very valuable," CNRL president Steve Laut says. "Reservoir risk is low and non-existent and the scale of these operations matter."

Suncor Energy, Canada's largest oil sands producer, has made three acquisitions, for a total of over $4bn, with the $3.2bn takeover of Canadian Oil Sands the largest. Suncor has cut its 2017 capex budget by C$1bn ($737mn), to C$4.8bn-$5.2bn, but expects a 13pc rise in production to around 700,000 boe/d.

Deal, or no deal

More deals are likely, in part because producers such as Cenovus aim to divest properties worth $3.6bn to part fund their large purchases, while others dispose of assets that are no longer core to their operations.

But Suncor chief executive Steve Williams cautions that the window may be closing, as assets become more expensive. "The successive deals are good, but they are more expensive than the Canadian Oil Sands deal," he says. "We have got the first mover advantage."

Producers are already seeing costs decline. Suncor's oil sands production costs have fallen by 7pc on the year to $17/bl, and it has set a goal to ensure total operations generate enough cash flow to cover dividends at $40/bl. CNRL's synthetic crude production reached a record high of 192,000 b/d in the first quarter, up by 50pc on the year, after its Horizon oil sands upgrader was expanded. And the facility's operating costs fell by 17pc from a year earlier to $22/bl.