Crude Economics
Canada’s Oil Sands Can’t Afford to Stop Now

This morning, American benchmark WTI crude was trading at just above $46, while Canadian crude benchmark Western Canada Select was down under $33. Roughly speaking, Canadian oil sands projects need an oil price of $80 per barrel to break even. These aren’t, you might surmise, the headiest of times for oil sands producers.

But when the going gets tough, the tough must keep going, or at least that’s the thinking in Alberta, which expects to boost production by 25 percent over the next two years, despite the fact that the market is already oversupplied and that oil will be sold at a loss. Why? Well, with so much money invested in massive projects, the companies involved have little choice but to keep on keeping on. Bloomberg reports:

For companies stuck spending billions in a downturn, the time required to earn back their investments will lengthen considerably, said Rafi Tahmazian, senior portfolio manager at Canoe Financial LP. “But the implications of slowing down a project are worse,” said Tahmazian, who helps oversee about C$1 billion ($758 million) in energy funds at the Calgary investment firm. […]

Operators can more easily suspend projects in the “front-end” engineering phase, after which it becomes more painful because the money already in the ground produces zero return, said Labell. If a company has the capital available, it will tend to press ahead even though falling prices are eating into profits, he said.

In the longer term, Canada’s oil sands are in a considerable amount of trouble. Global oil supply continues to significantly outstrip demand, making it hard to envision a swift return to the $100+ per barrel market conditions producers enjoyed last summer. Or, as University of Calgary professor Bob Schulz put it, “[t]he economics have changed and there’s no promise things will come back to the way they were.” That’s bad news for any high-cost oil producer.

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