Suncor Energy Inc. (USA) (SU), Talisman Energy Inc. (USA) (TLM): What Does the Future Hold for Canada’s Oil Sands?

According to the Canadian Association of Petroleum Producers, or CAPP, Canadian oil production will more than double over the next two decades, fueled by steadily growing oil sands production and a rebound in conventional production.

But could the rise of alternative energy sources such as solar render expensive oil sands projects unprofitable within the next several years? Let’s take a closer look.

CAPP’s projections
CAPP forecasts total production to reach 6.7 million barrels per day in 2030, compared to roughly 3.2 million barrels per day last year. It expects oil sands output to account for a little over three-quarters of the expected 6.7 million barrels per day in 2030, or around 5.2 million barrels per day.

Conventional crude and condensate from western Canada will make up the remaining 1.4 million barrels per day, while eastern Canadian production is expected to account for the remaining 100,000 barrels per day, CAPP reckons.

That compares to last year’s breakdown of 1.8 million barrels per day from the oil sands, 1.2 million barrels per day from western Canada, and 200,000 barrels per day from eastern Canada. CAPP’s updated estimates are also slightly higher than last year’s estimates, which forecast 5.02 million barrels per day from oil sands in 2030, 1.14 million barrels per day from western Canada, and 90,000 barrels per day from eastern Canada.

Risks to CAPP’s forecast
As CAPP itself admits, its projections are dependent on a number of assumptions. In my view, any projections about oil sands output growth out to 2030 are bound to be highly uncertain due to the litany of factors that could cause them to deviate sharply from reality.

Already, Alberta’s oil sands producers are finding it hard to cope with three major challenges: ballooning operating costs, depressed prices for Western Canadian crude oil, and greater competition from shale producers in the U.S. for what limited outbound infrastructure exists in Alberta.

The combination of these factors has made certain oil sands projects particularly challenging, depending on location and the method of extraction. Not surprisingly, some operators have decided to abandon some of the more expensive projects.

For instance, Total SA (ADR) (NYSE:TOT) recently abandoned its Voyageur Upgrader project, deciding to sell its 49% stake in the project to its joint-venture partner, Suncor Energy Inc. (USA) (NYSE:SU), for $500 million. Total defended the move to scrap Voyageur – a 200,000-barrels-a-day facility designed to “upgrade” bitumen into crude oil – by saying that it was “no longer justified from a strategic and economic” standpoint.