After a drought, signs of new growth in the oilsands

In March, with oil prices skidding under $40 US a barrel, MEG Energy quietly publisheda notice of its application to build a new oilsands project south of Fort McMurray. The May River project isn't huge it will top out atapproximately 164,000 barrels per day but it's important as a green shoot in Alberta'sbeleaguered energy industry.

"It's very positive in the sense that they're still investing money into future growth," said Kevin Birn, an oilsands analyst with IHS.

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MEG is a relatively smallplayer in the oilsands, with 80,000 barrels of production per day. Like all producers, it has struggled through the downturn, but the company turned a profit in the first quarter of 2016, earning $130 million as itgot control over its costs. This in a quarter when oil prices hit a low of $26 US a barrel.

An application isnot an investment

An application is not an investment decision, though. It's the very first step in a regulatory process that can takes years. No oil would be produced at May River until, at best, the 2020s.

"This isn't the point where they have to commit a large amount of capital," said Joe Gemino, an energy analyst with the investment research firmMorningstar.

"In order for that to happen, there needs to be sustained higher oil prices and the company needs to continue to drive down some of the capital and operating costs, which would make projects more economical at lower prices."

Oilsands construction set to slow

It'sbeen nearly two years since the oil downturn began. In June 2014, oil was trading at $103 US a barrel, a level that seems impossibly distant now. In the past 24 months, billion of dollars in oilsands development havebeen put on hold projects that were already approved by regulators but hadn't begun construction.

That means that in less than two years, unless some of those projects are revived, construction will essentially stop in theoilsands.

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"In 2015, we had nearly a million barrels under construction in the oilsands," said Birn."That would take two to three years to be completed and turned on and then ramped up for two to three years. That's why growth is fairly predictable to 2020."

Birn said that the ongoingconstruction has provided a buffer to Alberta and Canada's economy, butlooking to 2018, there are noprojects slatedto begin construction, at this point.

"That could be the first year that you don't have construction in the Canadian oilsands in as long as I can remember."

Prices need to recover before money is spent

There are many projects that could easily be brought back to life before 2018 if a few conditions are met. The price of oil is obviously the biggest variable, with an approved export pipeline in second place.

Oil futures traders are skeptical about future prices they have oil trading at just over $50 us a barrel in late 2018. Royal Bank is calling for $70 US crude, while TD Bank is calling for $65 oil. It's anyone's guess as to whether a pipeline will be under construction by that point.

"Prices need to exceed the break-even threshold," said Birn. "Andproducers need to feel confident about the the direction of future prices."

So while the MEG application is indeed a welcome green shoot, it's one that may not have the chance to grow in the near term.

"Just because the paperwork is going through doesn't mean this even happens," said Gemino."Or it could be 2023or 2030, there's so much uncertainty around it."

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