The European Union's recent estimates that Canada's oil sands produce 22% more greenhouse gases (GHGs) than conventional crude have sent both sides into a war of words. Current and future industry practices show that there is significant room for improvement. New techniques are being tested that will decrease emissions to standard levels and ultimately help producers sell more of their oil overseas.
The long-term issue
The narrative of dirty Canadian oil sands versus every other type of crude oil is a tad misplaced. The world has run out of easy-to-find oil with low energy intensity. The world's liquid hydrocarbon supply is growing thanks to energy-intense unconventional resources like oil sands and shale formations. Oil shale is estimated to have total GHG emissions per MJ of final fuel significantly higher than that of the oil sands.
GHGs are real and they need to be dealt with, but the world economy needs stopgap measures while a transition from crude oil to alternative fuels occurs.
Oil sands mechanics
When oil is stuck far beneath the topsoil in oil sands formations, Steam Assisted Gravity Drainage (SAGD) is used to extract the oil. The industry expects that the majority of new oil sands projects will be based on SAGD techniques. Water is heated, steam is produced, and then the resource is extracted. The creation of steam requires large amounts of energy and is one of the major GHG culprits.
The French oil giant Total (TOT +0.00%) estimates that it can cut CO2 emissions by 12% by reducing its steam to oil ratio (SOR) from 3.3 to 2.6. The story gets even better. The oil sands producer Cenovus (CVE 1.10%) expects to hit a SOR of 1.6 with its Narrows Lake development by adding solvents to its steam. Cenovus is not just dreaming up numbers, as its Foster Creek facility is already producing with a SOR of 2.1.
The majority of the oil sands' excess GHG emissions relative to conventional refinery feedstock comes from the extraction process. Carrying Total's estimates forward, reducing its SOR from 3.3 to 1.6 would reduce emissions by 29%. A number of studies estimating the GHGs of in-situ oil sands production use SORs in the 3.0 to 3.5 range. Seeing as the European Union's Fuel Quality Initiative gives the Canadian oil sands a GHG 22% above traditional crude sources, pushing down SORs is a practical way for the oil industry to reduce costs and make the oil sands environmentally acceptable.
Investor summary
Cenovus is an oil sands innovator and continues to drive down its SORs. Less steam means fewer GHGs emitted, less energy required for the extraction process and fatter margins. Its advanced SAGD facilities let it enjoy a supply cost from $35/bbl to $65/bbl. Even with discounted Canadian oil prices, Cenovus can turn a profit and easily support its total debt to equity ratio of 0.5.
Thanks to achieving first production at Christina Lake Phase E, it should be able to pump out a 2013 EPS of $1.72. It is trading around 17 times forward 2013 earnings, making it one innovator worth looking at.
Suncor (SU 1.70%) is one of the grandfathers of the Albertan oil sands. It is an experienced company with a low-risk approach. It carries little debt with a total debt to equity ratio of 0.29. In the second quarter of 2013 its Firebag and MacKay River facilities posted SORs of 3.4 and 2.6 respectively.
With a recent dividend hike and large share buyback the company has become attractive for investors looking for a stable oil sands investment. Planned maintenance brought down its recent operating earnings to C$934 million, but this should snap back as a number of planned maintenance events have been completed.
Total and ConocoPhillips (COP 2.83%) partnered together on the Surmount project. The companies hope to expand its production to 110,000 barrels per day by 2015. The project is relatively clean, as it has operated with a SOR around 2.5. Through ConocoPhillips' partnership with Cenovus on Cristina Lake and Foster Creek it is able to enjoy one of the better overall SORs in the industry.
Bottom line
Cenovus is a good oil sands investment with cutting edge technology that is driving down industry SORs. If you would like a smaller portion of your funds put into the oil sands, then Cenovus' partner ConocoPhillips is a second option. Suncor is a larger oil sands play than Cenovus, and it may be able to reduce its SOR by 0.3 with its experimental SAGD LTE technology. With a low debt load and steady dividend, Suncor is a stable investment that is slowly improving its environmental footprint.
