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Can Canada’s Oil Sands Adapt to Cheap Crude?

American shale producers have so far proved surprisingly resilient to cheaper oil and the crunched margins that low prices have brought to the industry, but the jury is still out for Alberta’s oil sands industry. Producers there have had to invest huge sums of money to get operations running, and these plays produce for significantly longer than their shale counterparts, whose output declines rapidly after fracking. As a result, oil sands production has shown little sign of slowing so far. The money has already been spent. The costs are sunk.

That said, oil sands production is among the most expensive in the world, and many see it as a question of when, not if, operators there will begin to reel from the effects of the bearish market.

So, can firms cut costs and adapt practices to survive at $60 per barrel crude in the longer term? Bloomberg reports:

The energy industry may avoid the fate of Canada’s manufacturers because Canada’s oil isn’t going anywhere, while factories can be moved around the world, said Alan Arcand, an economist at the Conference Board of Canada in Ottawa. “…Canada still remains an attractive destination for energy investment, given geopolitical concerns in other important oil producing countries,” [said Nick Exarhos, an economist at CIBC World Markets in Toronto]. […]

“…I am encouraged by is the decline that we observed in costs throughout the energy system, so suppliers and services, and that suggests that we are steadily improving our competitiveness in that sector for a given oil price,” [said Bank of Canada Governor Stephen Poloz].

The longer crude has stayed at its discounted level, the more high-cost producers like those working in Albertan oil sands have come to realize the necessity of bringing their own costs down. The global market is still significantly oversupplied, and with OPEC members hitting record outputs and a “fracklog” growing in the United States, $100+ per barrel oil isn’t even on the horizon.

Canada’s oil isn’t going anywhere, true, and the country lacks the instability that worries investors elsewhere in the world, but make no mistake: cutting costs and boosting efficiencies is the only way companies can survive in today’s market.

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  • Kevin

    Two other factors to consider:

    The Canadian dollar can (and I guess probably will) devalue relative to the U.S. dollar, perhaps considerably. This will greatly help their margins. It will also help this Canadian manufacturers referred to above who gave been hurt by the Loonie’s appreciation during the great commodity boom.

    On the other hand, a very left wing government was just elected in Alberta. A considerable fraction of its base is opposed to oil production. It could make life very difficult for Alberta’s oil producers. We’ll have to see if it is willing to undercut one of the provinces main industries.

  • Jacksonian_Libertarian

    The thing to remember about North American oil producer competitiveness, is that its transportation costs are $3-$5 per barrel lower than Imported oil. They have a captive market that can use all they produce, as the US is still a major oil importer (net imports of 5 million barrel per day).

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