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The North American Energy Boom
Canada’s Oil Sands Looking Like a Smart Bet

The collapse in crude oil prices made life difficult for producers the world over, but for those private companies overseeing relatively high-cost operations, the bearish market became something of a life and death issue. Canada’s oil sands are tremendously energy intensive, meaning that it takes a lot of work to get the admittedly massive quantities of crude trapped in the Albertan formations out of the ground. That production is also quite expensive, and the downturn in prices made it unprofitable. But as the WSJ reports, much of the initial investments necessary to get that oil sands crude flowing have already been made, so there’s still life yet for Canada’s oil ambitions:

[N]ew investments in oil sands are prohibitively expensive, as much as $45 a barrel above current prices, but cash returns on existing ones could be vastly superior if oil prices meet analyst expectations. Canadian Natural and Suncor, the two big Canadian producers, are expected to throw off free cash flow of $7.9 billion combined in 2018, according to analysts polled by FactSet. With a combined market value just under $90 billion, their combined free cash flow yield is nearly 9%. […]

The key is the distinction between fixed and variable costs. While the fixed investment in new oil sands projects is prohibitive, variable costs can be in the low $20 range per barrel. Not only do oil sands projects generate lots of cash at current prices but those costs are very stable and fields don’t require much investment to keep output steady for several years.

Reports of oil sands’s death have been greatly exaggerated, it seems. In fact, just last year—before oil prices began to tick back up as a result of petrostate production cuts—IHS Energy projected that output from Canada’s oil sands would grow 42 percent by 2025.

Betting on any new oil sands projects would be beyond foolish in today’s market, but that doesn’t mean that that corner of the oil industry is bereft of potential. Far from it, in fact—the WSJ suggests that “in the long run, the best place to invest may be the unpopular fields north of the border.” That’s not just good news for Canada, it’s good news for North America, which is in the middle of an energy revolution that has propelled it into the comfortable position of being one of the world’s biggest oil and gas heavyweights.

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  • Unelected Leader

    Those poor Albertans. They have to pay for everything. Canada has pretty bad age demographics. And Canada was capital rich but now it doesn’t have the replacement generation to pay for all of these lavish social programs, so the Albertans are saddled with much of it.
    I was up there hunting about a year ago and there was serious talk about possibly leaving Canada, and even about applying for US statehood!

  • The giant machines that dig up the sands are made by Caterpillar who may a) have a firesale and/or b) sell off their accounts receivable at a stiff discount. Bad for Cat, good for sands/shales.

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