It’s been a rocky ride for oil producers in the past year. But if your clients are looking to capitalize on the sector’s potential growth, analysts suggest that now may be the time to take the plunge. With oil prices back on the upswing, Canada’s oil producers could be headed for big gains after putting exploration projects back in motion.

Historically, Western Canada has been considered a “mature” basin for conventional resources exploration. Annual crude oil production has never surpassed 1973 levels. But rising oil prices — combined with innovations in drilling technologies — has changed this outlook, says Chris Feltin, an analyst with Macquarie Capital Markets Canada Ltd. in Calgary.

Among those innovations are advances in horizontal drilling. This method uses a drill that can plunge straight down into bedrock, then drill horizontally. There have also been developments in fractioning, a process in which water and sand are injected into land at extremely high pressures to crack the rock and establish flow paths for oil.

As a result, the cost of drilling in areas that were once deemed too “tight” for drilling, or in which the rock wasn’t porous enough, has dropped dramatically. One of these areas is the Bakken Formation in southern Saskatchewan, with its 350-million-year-old bedrock.

“Over the past five years,” Feltin says, “the application of horizontal drilling and new fractioning technologies has unlocked the value of this play and has allowed it to become a very commercial project.”

Currently, he says, about four to five billion barrels of oil have been identified in the bedrock. “It will take several years of drilling in the Bakken to develop that play fully,” says Feltin, adding that current technologies are able to bring only 10% of that oil to the surface over the next few decades.

One player flagged for success in this region is Calgary-based Crescent Point Energy Corp. , which owns the most land in play in the Bakken. The company’s revenue from oil and gas sales fell to $654.4 million in the nine months ended Sept. 30, from $1 billion in the same period in 2008. Net income also dropped significantly, to a loss of $27.1 million from a profit of $102.7 million. The drop in revenue and profits, Feltin says, is the result of low oil prices and production costs that have remained at the same level.

The other opportunity for Cana-dian oil producers rests in unconventional plays in Alberta’s Athabasca oilsands, says Andrew Potter, an oil and as research analyst with Calgary-based UBS Securities Canada Inc. But oilsands production is costly. Producing a barrel of sweet crude involves several processes. Tarsands, a combination of clay, sand, water, and bitumen — a heavy black oil — must first be mined; then, a physical process is used to separate the asphalt from the bitumen. A chemical process is subsequently used to convert the heavy oil into light sweet crude oil.

“People have known about opportunities in the oilsands for many, many years,” Potter says. “But it was a matter of finding the right technology and the right price level to make them economically viable.”

With the price per barrel of oil skyrocketing to a record high of US$145 in July 2008, labour costs for excavating the oilsands were much too high, says Potter: “When oil prices get too high, too many move to develop projects at the same time, so the cost escalation can just be dramatic.” In addition, demand still outweighed supply at that time, which caused production prices to be pushed up even further.

It wasn’t until September 2008 that the roller-coaster came crashing down, as financial markets began to crumble and the global supply of oil began to outpace demand. Suddenly, producers began to halt exploration projects that were already on the go. By the end of October 2008, oil had fallen to US$68 a barrel and continued to decline to an ultimate low of US$30 in December of that same year.

But with the price per barrel of oil now rebounding to around US$79, it is high enough for big players to start putting oilsands projects back in motion. “What’s happened over the past six to nine months [is that] we’ve seen oilsands costs correct very rapidly,” says Potter, adding that labour costs are still relatively low as a result of the tumble. “The cost of oilsands production looks justifiable again.”

@page_break@Calgary-based Suncor Energy Inc. is one of the oilsands players best positioned to benefit from the current upswing in prices. In July, Suncor merged with Petro-Canada, another major producer, Potter says, which allows the merged entity to reduce its cost of capital for developing oilsands dramatically.

“[Suncor is] more capable of internally funding its growth profile,” says Potter, adding that prior to the merger, Suncor would have required an oil price of at least US$80-US$90 a barrel to fund an oilsands project; however, since merging with Petro-Canada, that minimum level has dropped to US$50 a barrel.

Suncor’s revenue for the six months ended June 30 was $9.9 billion, a decrease from the $14 billion it earned during the same period in 2008. It posted a loss of $240 million for the six months this year, down significantly from net earnings of $1.5 billion. The reason for the sharp drop in revenue is two-fold, Feltin says: Suncor not only experienced a declining price for its commodities, but also a decreased demand; in addition, it was also hit by higher operating expenses associated with increased production in the oilsands.

Another star in the oilsands is Calgary-based Canadian Oil Sands Trust, Feltin adds. Its revenue for the nine months ended Sept. 30 dropped to $1.9 billion from $3.8 billion in the same period in 2008. Net income also fell, to $336 million from $1.4 billion a year earlier. The company was hit by a quadruple whammy of falling prices for oil and gas, as well as a decline in sales volume for both resources.

But now that the price of oil is on the rise, revenue should improve in the next year, Feltin says. However, he points out, this is only as long as the Canadian dollar does not surpass parity with the U.S. dollar. “Since oil is priced in US$,” says Feltin, “the price that Canadian producers receive for their oil actually decreases as the C$ increases.”

Although oil prices have strengthened over the past six months, a concurrent rise in the C$ vs the US$ has lessened the positive impact for Canadian producers, he adds: “The benefit for Canadian oil producers hasn’t been as pronounced as it has for producers in the U.S.”

Another challenge for producers is the potential cost of carbon dioxide emission regulation. “C02 emissions are something that every company is going to have to address, whether they are conventional producers in Saskatchewan or oilsands producers in Alberta,” Feltin says. “There is a lot of uncertainly about what C02 mitigation is going to cost in the longer run.”

However, Potter says, improvements in technology should provide a brighter outlook. IE