Canadian Oil Sands Developments: Will Cost Hyper-inflation Curb Attractiveness?
Press release, Woods Mackenzie, March 2007
In its latest analysis of Canada's oil sands assets, Wood Mackenzie finds that capital costs per peak flowing barrel have increased by some 55% since the beginning of 2005, putting pressure on returns on investment in an area where project economics are already considered relatively marginal.
Conor Bint, Upstream Research Analyst for Wood Makenzie said; "Marginal economics have always been a concern for companies operating in the oil sands, breakeven prices are high and rates of return relatively low in comparison with conventional projects, particularly for mining projects." Wood Mackenzie estimates that mining projects have an average breakeven price of US$28/bbl and IRR of just 16%. Rates of return are more favourable at the less capital intensive in-situ projects, averaging around 22%. ...
Between now and 2015, Wood Mackenzie expects some Cdn$125 billion to be spent in the oil sands sector, representing a 42% increase on its early 2006 forecast for the same period (Cdn$88 billion). Wood Mackenzie's analysis finds that the significant increase in costs is largely due to labour shortages and increased material costs, which have created a hyper-inflationary environment within the oil and gas industry in Alberta. ...
The report concludes that costs are set to continue increasing, which leads to the question of how long the current pace of development can be sustained. Bint said; "Companies in the oil sands will have to control capital expenditures going forward to ensure that project breakeven prices do not exceed current levels in order to remain profitable." ...
Wood Mackenzie's report states that Canada's proven oil reserves are second only to Saudi Arabia, at around 179 billion barrels. Of this, around 97% or 174 billion barrels is attributed to oil sands. Currently, output from oil sands stands at around 1 million barrels a day, accounting for approximately 35% of total Canadian production. However, based on projects that Wood Mackenzie considers commercial, this is forecast to increase to around 4 million barrels per day or 89% of total Canadian production in 2020.
The bitumen that is produced from the oil sands has a more complex molecular structure than crude oil. It contains too much carbon and too little hydrogen, and must go through a costly upgrading process. The end product is so-called synthetic oil that can be moved through pipelines and refined into gasoline and other products.
In a separate study entitled Unconventionals - The Hidden Opportunity Wood Mackenzie's examines the location, size and key issues associated with developing Unconventional Hydrocarbons around the world. The study signals increasing reliance on hard-to-develop sources of energy such as the Canadian oil sands and Venezuela’s Orinoco tar belt. Looking to the future, they say that by 2025 unconventional oil is expected to supply more than 20% of global demand.
The are are environmental concerns, and high water and natural gas use associated with these operations. The oil companies work under strict environmental guidelines requiring that they run relatively eco-friendly operations and reclaim land as they finish mining. There is now talk of building nuclear power plants to supply the energy needs of the oil sands. The U.S. favors an energy policy that obtains more oil from friendly Canada rather than from volatile parts of the world. According to this report Canada - which in 2005 replaced Saudi Arabia as the single-largest supplier of energy to the U.S. - will continue that position over at least the next two decades, thanks to the multi-billion dollar oil sands developments in Alberta.