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

For those looking to invest in Canada’s oil sands, the types of projects oil sands producers pursue and their cost structures are crucial considerations.

Jun 14, 2014 at 5:00PM

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.


Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Total (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers