Situation Analysis

The Canadian oil sands industry is facing multiple challenges. Companies looking to start new oil sands development projects face significant hurdles due to growing environmental concerns, a slow regulatory approval process, and a relatively high cost structure. Lack of spare export pipeline capacity has resulted in a large discount for the industry’s products compared to light oil. Competition from US shale is threatening the industry’s position in the global oil market.

SDG worked with a major oil sands operator to overcome these challenges by creating a long-term lease development strategy to replace existing production. The company had large undeveloped bitumen resources, but its undeveloped leases were located far from its existing operations and required building significant new facilities and infrastructure. Other oil sands operators in the region with adjacent lease positions were facing similar challenges.

Discovery and Solutions

SDG led the company and its partners (some of whom also operated in the region) to identify alternatives that would replace current production with adjacent leases owned by other operators. This required lease swaps or transactions among operators, allowing for the reuse of much of the existing facilities and infrastructure while minimizing transportation costs. All strategic alternatives were developed and reviewed thoroughly by the team, which included representatives from each of the partners.

SDG facilitated the process of defining each alternative in detail, including the impact of distance between production and processing facilities and determining appropriate development schemes for a given lease under different operators. The range of uncertainty in bitumen resources for undeveloped leases and all major cost components were assessed. The analysis considered total bitumen supply for the region, encompassing both the company’s and adjacent operators’ leases. Ultimately, the partners were able to optimize how each operator’s capacity to develop new leases could be matched against the remaining resources to produce the best economic outcome for the region’s operators.

Results and Impact

By swapping or monetizing undeveloped leases among themselves, the region’s oil sands operators arrived at a new strategy that is expected to create billions of dollars of value, as these transactions would minimize capital investment in new facilities by utilizing nearby existing facilities and infrastructure. These types of transactions will also help to accelerate development of bitumen resources by reallocating resources to operators with available processing capacity that might otherwise have been underutilized. In addition, the company and its partners better understood how to allocate value among the operators, paving the way for a set of commercial terms for potential transactions to which the involved operators could agree.