Analysis: Imperial Oil, Teck double down on Canadian oil sands after others flee

By Rod Nickel

WINNIPEG, Manitoba (Reuters) - Two Canadian-based crude producers are looking to double down on their oil sands investments, betting that new pipelines and cutting-edge technology can improve profitability and reduce environmental damage.

The moves by Imperial Oil Ltd and Teck Resources Ltd run counter to an exodus of foreign companies from the oil sands last year.

Calgary-based Imperial, majority owned by Exxon Mobil Corp , said late on Tuesday it would build its C$2.6-billion Aspen project. Construction starts before year-end, with first oil expected in 2022.

Teck has not yet made a final investment decision on its C$20.6-billion Frontier project, which is undergoing regulatory hearings.

Both are advancing as pipeline congestion resulted in record discounts on Canadian oil last month. Imperial and Teck bet it will abate in the next few years.

Enbridge Inc is expanding its Line 3 pipeline to handle more Canadian crude, and producers hope the Ottawa-owned Trans Mountain and TransCanada Corp Keystone XL pipeline expansions go forward despite opposition.

A stream of foreign companies such as ConocoPhillips divested oil sand assets last year. Steep price discounts prompted Canadian Natural Resources and several others to announce up to 98,400 barrels per day (bpd) in total production cuts last week.

But Imperial said Aspen will use solvents and steam to unlock 75,000 bpd, applying new technology to reduce emissions and water use while making extraction more economical.

"We try not to get too excited when times are good and try not to get too depressed when times are bad," Chief Executive Officer Rich Kruger said at Imperial's investor day in Toronto on Wednesday. "When's the best time to build things? When no one else is building, because you get the highest quality trades and contractors."

Both projects face doubts that they will pay off.

"The challenge with both is oil sands projects are typified by high up-front capital," said IHS Markit vice-president Kevin Birn. "And you have to wait years before you generate any revenue."

Teck began regulatory hearings in September for Frontier, an open-pit mine that would produce 170,000 bpd in its first phase, starting in 2026. The company said on Monday Frontier would be economical at a range of oil prices and rank among the lowest-emitting oil sands operations due to new technology.

"While we know that use of alternative energy will increase, we also know that oil will remain an important part of the world energy mix," Teck spokesman Chris Stannell said. "The long-term outlook for the global oil market is favourable for a project such as Frontier."

Unlike proposed pipelines, Aspen and Frontier have the support of aboriginal peoples living nearby. Mikisew Cree First Nation conditionally supports Frontier and hopes to buy a stake, said Melody Lepine, the band's director.

That support should reassure shareholders, Lepine said. "Teck and Imperial can go back to their investors and say, 'look we have these agreements with indigenous communities.'"

Mikisew and another band invested last year in a Suncor Energy storage facility.

Some Teck investors remain skeptical that the coal miner should be in the oil business, said Clarksons analyst Jeremy Sussman. Teck owns part of a Suncor oil sands mine.

"Do you double down? Do you divest? It's an open question," he said.

The odds appear longer for Teck's higher-cost Frontier to succeed than Imperial's Aspen, said Manash Goswami, senior vice-president at First Asset ETFs, which owns Imperial shares.

The Teck Frontier project "doesn't make any sense," Goswami maintained. "It's hard to see, unless oil prices go materially higher, another mining project getting sanctioned."

But a one-time industry opponent now sees a future for crude.

Chief Allan Adam of Athabasca Chipewyan First Nation recently backed Frontier. He reasoned that oil is not going away and he can better protect community interests from the inside.

"If people are saying the oil sands are going to die off, I imagine they're going to park their vehicles and start walking. I don't think that's going to happen anytime soon."

($1 = 1.3057 Canadian dollars)

(Reporting by Rod Nickel in Winnipeg, Manitoba; Editing by David Gregorio)