Last week Husky Energy Inc. (TSX:HSE) gave the green light to start construction on the Rush Lake 2 project, which is a new 10,000 barrels per day project in Saskatchewan. The project, which won’t deliver a drop of oil until late 2018, is a rarity these days.
The project is one of the few long-term oil projects that has been given the green light since oil prices crashed, with most oil companies deferring these type of investments in favour of projects that can generate quick cash flow.
The long pause
According to a report earlier this year by Wood Mackenzie, more than 45 major projects totaling US$200 billion have been deferred by energy companies since the start of this year. In fact, the industry only sanctioned a half dozen major projects in 2015 and is only expected to sanction about 10 in 2016. That’s well below the 40-50 projects that are typically given the green light each year.
The bulk of these projects have been major offshore projects, with 50% of the deferred investments being deepwater projects. However, Canadian investments have been hit almost as hard with new oil sands projects representing 30% of the spending cutback. This includes delays to phase two of Husky Energy’s own Sunrise expansion, which is still in the pre-engineering phase.
One step at a time
One of the major reasons why Husky and others are deferring oil sands projects has to do with the large costs involved; for example, phase one of Sunrise cost $2.5 billion. That said, the primary reason why the cost is so high is because these are massive projects; Sunrise’s production from that phase hit 60,000 barrels per day.
Rush Lake 2, however, is a much different type of project both in terms of the type of oil to be extracted, which in this case is heavy oil instead of bitumen, as well as the way this and similar projects can be phased. The company calls these projects “bite-sized” because it takes a bit of a cookie-cutter approach, enabling it to use a highly standardized and modular approach to development. This keeps costs low, enabling the company to earn a solid return even at today’s low oil prices.
Further, these projects can be staged to drive steady growth. Husky will slowly grow its thermal oil production from 18,000 barrels per day in 2010 up to 80,000 barrels per day by the end of next year after three more phases come online. Additional projects are already in the pipeline, and Husky has three 10,000 barrel per day Lloyd Thermal phases that are close to being sanctioned, which could deliver first oil in the 2019-021 time frame.
Husky Energy is one of the few oil producers that has given the green light to a large, long-term oil project in Canada. That said, one of the reasons it was able to approve the Rush Lake 2 project is due to the small size and price tag when compared to an oil sands project.
By taking a more manufactured approach to these small-scale projects, Husky has pushed costs down to the point where the project is economical even at today’s oil price, though it is ideal that oil prices be a lot higher by the time the project comes online in 2018.
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Fool contributor Matt DiLallo has no position in any stocks mentioned.