Amidst project uncertainty, Canadian oil companies are enforcing capital discipline as the costs of oil sands and bitumen projects creep up, compelling many companies and their investors to prioritize only the most profitable ventures. For example, Suncor Energy Inc. announced a billion-dollar cut for the rest of the year even though the company raised its oil price forecast. In general, cost escalation is causing oil sands participants to rethink the economics of projects as US refiners, the targeted customer, find other more lucrative feedstock sources.
UK think tank Carbon Tracker Initiative (CTI) is out with a compilation of the world’s costliest oil projects under consideration by big oil companies. The report lists 20 projects with a combined price tag of $90.6 billion. Nine of the top 20 are in Canada. Eight of those are oil sands projects in Alberta. The rest are either deepwater or Arctic projects. All of them, according to CTI’s analysis, need oil prices to be at least $95 a barrel.
Despite the chaos in oil-producing parts of the world, such as Iraq, crude prices have been flat since 2011, averaging about $109. This surprisingly steady trend over the past three years is largely a function of the US shale boom, which has cushioned the blow of geopolitical chaos while keeping high quality oil flowing globally.
Amongst the global energy industry, the Canadian oil sands industry is particularly vulnerable given their higher development costs, remote location and infrastructure challenges. In May, France’s Total SA halted an $11 billion oil sands mine project planned with joint venture partners Suncor, Occidental Petroleum and Inpex Canada. But these investments were launched at the beginning of the 21st Century with the confidence that US refiners would buy most or all of the bitumen-based heavy crudes to feed their expanded heavy oil upgrading units, including delayed cokers, visbreakers, hydrocrackers, etc. Later, Chinese oil companies and refiners started weighing in on the heavy Canadian crude expansion to diversify their crude supply away from other sources, including Venezuela and Russia. But only recently, Chinese oil companies have expressed their disappointment with their return on investment connected to these Canadian projects.
According to Canadian sources, existing in-situ oil sands projects in Alberta are produced at a break-even cost of US$63.50 per barrel on average, while integrated oil sands mining projects have a breakeven cost of US$60 to US$65, including a 9% after-tax return, compared to the Saskatchewan Bakken Shale’s US$44.30 a barrel cost. In a weird way, the US shale boom has worked against major integrated oil companies by keeping prices lower than what they would’ve otherwise been. Alot of the major oil companies missed the early days of the shale boom. Most of the first movers were midsize companies, such as Chesapeake Energy, Pioneer Natural Resources, and Devon Energy. When the majors bought in, a lot of them did so at higher prices. That has pushed their cost curve up even more over the past decade.
Deloitte LLP said in a recent report. “Even with oil at more than $100 per barrel, some large producers have been cancelling projects because higher costs have crimped returns.” Another recent CTI report estimated that several oil sands projects would be economically impractical at oil prices below $130 per barrel. However, Canada’s nascent shale resources are only now beginning to be developed. Canada’s regulatory body is looking to help with the economics that accompany the long development cycles typical of the energy industry, including shale. The Alberta Energy Regulator (AER) said it will test a play-based regulatory framework for unconventional oil and gas development, starting with an area in Duvernay, in west-central Alberta. Traditionally, the AER regulates the industry well-by-well. If this initiative works in the long-term, Canada will be in the enviable position of being able to market both heavy and light feedstocks on the global market.
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