What Total's Recent Move Says About Canada's Oil Sands

Total SA (NYSE: TOT  ) , one of the biggest European oil majors, took a $1.65 billion first-quarter loss after it decided to abandon a major venture in Canada's oil sands – the Voyageur Upgrader project.

Total will sell its 49% stake in Voyageur to its joint venture partner, Suncor Energy (NYSE: SU  ) , one of the biggest players in Alberta's oil sands, for $500 million. The company defended the move by saying that the project was "no longer justified from a strategic and economic" standpoint. By scrapping Voyageur, Total will save roughly $5 billion over the next five years.

Last month, Suncor announced that it has also decided to abandon the project, for which it is expected to take a $140 million writedown in the first quarter. The project would have been the third upgrader – a facility that converts bitumen into synthetic crude oil – at Suncor's development site in Fort McMurray, Alberta.  

Total's other oil sands ventures
Though Total has scrapped the project, that doesn't mean it has given up on Canada's oil sands entirely. Progress in the company's two other major mining-related ventures, the Fort Hills and Joslyn projects, in which Total bought stakes from Suncor back in 2010, will continue despite the company's decision to abandon Voyageur.  

Yves-Louis Darricarrere, head of upstream at Total, reaffirmed the company's stance on future development in Alberta's oil sands, saying in a statement: "The Fort Hills and Joslyn mining projects are not affected by the decision to withdraw from the Voyageur project, and Total remains totally committed to playing a significant role in Canada's future oil sands development."

Deteriorating economics
The move by Total and Suncor to throw in the towel on the expensive upgrader project highlights how the economics of some oil sands projects have become less appealing, as competition from U.S. crude oil supplies, especially those produced in North Dakota's Bakken shale, has grown.  

"Since 2010, market conditions have changed significantly, challenging the economics of the Voyageur project," said Steve Williams, Suncor's CEO.

In addition to competition from cheap American shale oil, Canadian oil sands operators have to cope with spiraling production costs and depressed prices for oil sands crude. Western Canadian Select, the benchmark for crude oil produced in Alberta's oil sands, has traded at a massive discount to similar heavy crude oil benchmarks for much of the past year, though prices have risen recently due to seasonal factors.

While soaring costs and depressed crude oil prices continue to plague Alberta's oil sands producers, operators in North Dakota's prolific Bakken Shale are faring much better. Operating costs have come down substantially and numerous companies, such as Kodiak Oil & Gas, are reporting staggering efficiency gains. Kodiak is a dynamic growth story – it offers tremendous opportunities, but with those opportunities come great risks. Before you hitch your horse to this carriage, let us help you with your due diligence. To find out whether Kodiak is currently a buy or a sell, you're invited to check out The Motley Fool's premium research report on the company, which comes with a full year of updates and analysis as key news breaks. To get started simply click here now.


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