In Canada’s oil sands region, there’s one metric that matters more than any other to energy investors. It’s called the steam-to-oil ratio, or SOR. Companies like ConocoPhillips (NYSE: COP) and Cenovus Energy (NYSE: CVE)(TSX: CVE) lead the pack when it comes to this important metric, which will yield more profits to investors over the long run.
Drilling down into the SOR
There are two ways to extract oil from the oil sands. In some areas it can be mined at the surface, but everywhere else it’s produced using an in situ process called steam-assisted gravity drainage, or SAGD. For example, Suncor Energy (TSX: SU)(NYSE: SU) produces a lot of oil by mining it at its Base Mine operation.
Furthermore, the company has a steady stream of oil sands mining projects in the future, including its Fort Hills project. Producers like Suncor Energy undertake projects to mine the oil sands because they can recover nearly 90% of the original oil in place, which is substantially more than the 35% that’s recovered from a conventional oil well. However, these mining projects can be really expensive to develop, which is why Suncor recently put its Joslyn oil sands mine project on hold.
Only about 20% of the oil sands can be mined, which is why producers use in situ SAGD processes to extract the rest of the oil. This process uses steam to melt the bitumen and make it viscous enough to flow up a well bore. However, some companies are much better at using less steam to produce this oil, which is where the SOR becomes an important metric. The reason it’s important is because the less steam needed to extract each barrel of oil, the cheaper the extraction costs of the oil, the lower the carbon emissions, and the higher the profit margins.
Cenovus Energy really leads in this key ratio. It has the top four oil sands projects in the industry, three of which are part of a 50% joint venture with ConocoPhillips. Because of this, the company can produce oil for an average supply cost of between $35 to $65 per barrel. That’s as much as half of what it costs its peers, as the global average supply cost of oil is $70 per barrel. This makes Cenovus Energy’s projects among the most profitable in the industry.
The secret to lowering the SOR
One of the secrets companies like ConocoPhillips and Cenovus Energy have found to keeping the SOR low is to use solvents to aid the process. These increase the production rates per well, which lower the SOR and emissions. Peers like Devon Energy (NYSE: DVN) are catching on and testing solvents as well. The company sees solvents decreasing its SOR 15%-50%, which will have a big impact on the economics of its oil sands projects.
In addition to solvents, oil sands producers are investing in technology to reduce the SOR. For example, Suncor Energy invests over $175 million per year in research and development. One of its current targets is to reduce the SOR at its own in situ projects. Meanwhile, Husky Energy (TSX: HSE) is evaluating more than 75 technologies to drive down costs at its Sunrise Energy Project in the oil sands, which delivers first oil this year. Sunrise is just in the first phase of a multi-phase project that’s expected to deliver oil production growth for Husky Energy over the next decade. These technologies that Husky Energy is testing could be the key to turning its next phases into even more profitable projects for the company.
For many oil sands projects the steam-to-oil ratio is the key to developing a profitable project. Right now ConocoPhillips and Cenovus Energy lead the way with the best SORs in the business. However, peers like Devon Energy, Suncor Energy, and Husky Energy are using solvents, as well as investing in new technologies, to improve their own SORs and better compete with the low-cost suppliers. These investments could really pay off for investors, as dropping the SOR will improve profitability.
