With oil prices falling so dramatically over the past year, energy companies need to keep their costs in line in order to deliver meaningful growth. That’s just what Enbridge Inc. (TSX:ENB)(NYSE:ENB) is doing through its recently announced optimization of its Regional Oil Sands System. The company’s optimization plan will shave $400 million off the cost of the system, while still meeting all of its contractual commitments.
Scope of the project
Enbridge’s Regional Oil Sands System is currently undergoing a $5.6 billion expansion through several projects. Once complete in 2017, the project will connect 11 oil sands projects to regional oil transportation hubs in Edmonton and Hardisty. The main purpose of these projects is to help producers economically get their oil to these hubs, where it can be shipped to refineries.
What the company is doing through its optimization plan is basically combining and upgrading the Athabasca Twin project and the Wood Buffalo Extension project. The company will use bigger pipes and more horsepower in order to ship almost as much oil as in previous projects but at a much lower cost. Enbridge provided the following map to detail the changes.
Source: Enbridge Inc Press Release
In optimizing these projects, Enbridge will save $400 million in capital costs, and those savings will be passed on to customers in the form of lower pipeline tolls. However, even though the company is passing these savings down to customers, it will still earn a very attractive return on the project for its investors.
Why it’s needed
Given that reliable transportation has been such an issue for oil sands producers in the past, Enbridge is hoping that its expansion projects will keep these issues to a minimum in the future. However, it is important to note that the Wood Buffalo Extension project in particular was designed with one specific oil sands project in mind, which is Suncor Energy Inc.’s (TSX:SU)(NYSE:SU) Fort Hills oil sands mine. That project was given the green light in 2013, and when Suncor and its partners approved that project, they also secured commercial agreements with Enbridge, which resulted in the Wood Buffalo Extension being given the green light.
With Enbridge now optimizing the project, it is not only saving itself money, but it will save Suncor money too. That will help boost the returns Suncor earns on Fort Hills, as it won’t cost quite as much to ship that oil out of the region. Those saving could really help the company in the future if the oil price doesn’t recover by the time Fort Hills comes online in late 2017.
Energy companies are taking a hard look at expansion projects and are looking for ways to cut costs in order to boost returns. If these optimization projects can be found, it can have a ripple effect, as in this case. Not only will Enbridge save money, but key customers like Suncor will also save over the long term. That makes this optimization project a win-win for the investors of both companies, as each will earn more money over the long term, giving them a bit more cash to pay future dividends.
Fool contributor Matt DiLallo has no position in any stocks mentioned.