EnCana's New Oil Sands Plan

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The Canadian oil sands appear to be running alternately hot and cold these days.

Imperial Oil (AMEX: IMO) signaled the first sign of life with an intention to expand its Cold Lake operation, while PetroChina (NYSE: PTR) turned up the heat further by taking a $1.7 billion stake in two of privately held Athabasca Oil Sands' projects.

This week, we saw Total SA (NYSE: TOT) throw some more cold water on its Joslyn oil sands project. Meanwhile, EnCana's (NYSE: ECA) soon-to-be-spun-off integrated oil arm, Cenovus Energy, announced that it's moving forward with a new multibillion-dollar project at Narrows Lake.

Narrows Lake is just north of Christina Lake, one of the properties subject to Cenovus' joint venture with ConocoPhillips (NYSE: COP). The planned method of extraction is steam-assisted gravity drainage (SAGD), which has the handy feature of scaling up in phases. Suncor's (NYSE: SU) Firebag project is one example of the way these developments tend to work. Cenovus will likely start at 40,000 barrels per day and ultimately scale the project up to two or three times that rate.

The more I study these SAGD projects, the more attractive they look relative to the hulking bitumen mining and trucking operations like Canadian Natural Resources' (NYSE: CNQ) Horizon project. For a rundown of the benefits, see my recent look at Gulfport Energy's undeveloped oil sands assets.

For now, let's just focus on cost. Last year, I noted that Horizon came online at a capital cost of around $84,000 (Canadian) per daily flowing barrel -- a discount compared to Suncor's projections for its own Voyageur expansion. It's not unreasonable to assume that Cenovus can develop Narrows Lake at half the per-barrel cost of these open-pit mining operations.

I think these economics go a long way toward explaining why EnCana/Cenovus can push forward with this plan while Total sits around waiting for higher oil prices.