Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Don't Sell Off the Oil Sands Because of Climate Change?

A recent report from the London-based Carbon Tracker Initiative think tank warns that many oil companies are committing too much money to projects with high breakeven costs, putting them at great risk should oil prices see a sustained decline.

The report argues that policies aimed at curbing climate change, such as energy efficiency mandates and restrictions on greenhouse gas emissions, are likely to significantly reduce future global oil demand, exerting downward pressure on oil prices.

Such a scenario, Carbon Tracker said, would be especially bad for projects with high costs of production in excess of $95 per barrel for Brent crude. It identified Canadian oil sands operations, as well as certain deepwater, tight oil, and other projects, as being especially vulnerable to an extended declined in oil prices.

But before you rush to sell off your holdings in companies focused on the oil sands, there is one very important thing to keep in mind: not all oil sands projects are created equal. While some indeed have breakeven costs as high as $100 per barrel, others are quite economical.

A major oil sands mining operation in Alberta, Canada. Photo Credit: Flickr/jasonwoodhead23.

The economics of Canada's oil sands
According to a recent study by Scotiabank, western Canadian oil production is actually more economical, on average, than tight oil operations in major U.S. shale plays including the Bakken in North Dakota and the Permian Basin and Eagle Ford, both in Texas.

After assessing more than 50 plays across North America, Scotiabank analysts found that Canadian oil production has an average full-cycle breakeven cost of $63-$65 per barrel, compared to the U.S. average breakeven cost of $72 per barrel. Scotiabank defines breakeven costs as the West Texas Intermediate benchmark price required for a given project to yield a 9% after-tax return on full-cycle costs.

The report found that the average steam-assisted gravity drainage oil sands project in Alberta breaks even at roughly $63.50 per barrel. Even existing oil sands mining and upgrading projects in Fort McMurray, often characterized as some of the least economical oil projects in the world, yield full-cycle breakeven costs in the range of $60-$65 per barrel.

By comparison, projects in West Texas' Permian Basin require an average price of $81 per barrel to break even, while North Dakota Bakken oil production needs an oil price of about $69 to be profitable and Eagle Ford operations require just over $63.50 per barrel, according to Scotiabank.

Cost disparity between in-situ and new mining projects
However, new mining and upgrading projects in Canada's oil sands have considerably worse economics, requiring a $100 oil price to break even. Indeed, high operating costs are already holding back a number of new oil sands mining ventures. For instance, Total (NYSE: TOT  ) recently announced that it is suspending work at its Joslyn oil sands mine in northern Alberta due to severe cost inflation.

The project, which Total operates alongside partners Suncor Energy (TSX: SU  ) (NYSE: SU  ) , Occidental Petroleum (NYSE: OXY  ) , and Japan's Inpex, was estimated to cost $11 billion. At this cost, the project simply wouldn't have generated sufficient margins and operating netbacks to justify the investment, even with currently high Canadian heavy-oil prices.

On the other hand, costs at Surmont Phase 2, a steam-driven in-situ expansion project being pursued as a 50/50 joint venture between Total and ConocoPhillips (NYSE: COP  ) , are highly competitive. According to Conoco, full-cycle finding and development costs for Phase 2, which is scheduled to start up in 2015, are estimated at just $20 a barrel. That's even lower than Conoco's full-cycle costs of $20-$25 per barrel in the Eagle Ford and Bakken, two of the most economical U.S. shale plays.

Investor takeaway
The results of Scotiabank's study challenge the common assumption that Canadian oil sands operations are some of the least profitable in the world due to extremely high operating and development costs. But there is a massive disparity between operating costs for different projects in Canada's oil sands, as the examples of Surmont and Joslyn highlight. As such, investors should pay special attention to oil sands producers' cost structures as a prolonged slump in oil prices could render several new mining and upgrading projects uneconomical.

OPEC is absolutely terrified of this game-changer

Just as Canada's energy landscape is changing radically, so is America's. US oil production continues to surge as our country moves closer to energy independence. And there is one company front and center that is poised to make its investors rich. Warren Buffett has already committed to it, and you can too. Click here to learn about this company in the Motley Fool's special report: OPEC's Worst Nightmare.


Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2994577, ~/Articles/ArticleHandler.aspx, 9/4/2015 9:32:37 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Arjun Sreekumar

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

Today's Market

updated 16 minutes ago Sponsored by:
DOW 16,102.38 -272.38 -1.66%
S&P 500 1,921.22 -29.91 -1.53%
NASD 4,683.92 -49.58 -1.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 4:00 PM
COP $47.20 Down -0.98 -2.03%
ConocoPhillips CAPS Rating: *****
OXY $69.65 Down -1.21 -1.71%
Occidental Petrole… CAPS Rating: ****
SU $35.00 Up +0.05 +0.14%
SU $26.36 Down -0.13 -0.49%
Suncor Energy, Inc… CAPS Rating: ****
TOT $44.11 Down -1.42 -3.12%
Total (ADR) CAPS Rating: *****