Oil-Sands Keep Churning With Crude at $75, Not Growing

The Canadian oil-sands frenzy that led to $265 billion of investments in less than a decade won’t immediately stop with $75 crude. Two years from now is another matter.

Oil-sands projects are multibillion-dollar investments made upfront to allow many years of output, unlike competing U.S. shale wells that require constant injections of capital. It’s future expansion that’s at risk.

“Once you start a project it’s like a freight train: you can’t stop it,” said Laura Lau, a Toronto-based portfolio manager at Brompton Funds. Current oil prices will have producers considering “whether they want to sanction a new one.”

The price rout is intensifying challenges of developing the world’s third-largest proven reserves amid soaring labor and steel costs in northern Alberta and a lack of pipelines like TransCanada Corp.’s proposed Keystone XL.

While existing operations such as Suncor Energy Inc.’s Millennium mine can keep running, projects under consideration by companies including Devon Energy Corp. and Cenovus Energy Inc. face the threat of delay. Decisions may impact a more than doubling of oil-sands production, to 5.2 million barrels a day by 2030, estimated by the Canadian Energy Research Insitute.

New projects using drilling and steam to coax bitumen from the ground require U.S. crude prices of $85 a barrel to be profitable, according to the institute. Mining projects need more than $106 a barrel, while mines with upgraders to convert bitumen into synthetic light oil require $110.

For mines that are already operating, companies can produce at $36 a barrel, said Dinara Millington, senior research director at the institute.

‘Not Typical’

“The oil-sands project is not a typical oil project because it produces at the same level for decades,” Millington said. “Once you’ve sunk your capital and recovered a return on your capital, after that it’s just operating costs.”

West Texas Intermediate, the U.S. benchmark, plunged about 29 percent from this year’s June high to $75.78 a barrel yesterday after a shale boom propelled U.S. crude volumes to their highest since 1986 and slowing global growth pared the outlook for demand. Some producers have already curbed drilling in U.S. shale regions. WTI was little changed at $75.76 at 10:45 a.m. in New York today.

About a quarter of oil-sands projects are at risk as prices fall, according to the International Energy Agency.

Nine out of every 10 barrels of potential oil-sands production require $95 per barrel, according to Carbon Tracker Initiative, a group that highlights the risks of climate change to fossil-fuel investors. Investors should be questioning why more projects aren’t being shelved, said James Leaton, a research director at Carbon Tracker.

‘More Pressure’

“If the oil price stays down for the next year, we’ll see a lot more of that pressure,” Leaton said.

Developers have already started scrapping or delaying projects after a period of rampant construction. They spent about C$300 billion ($265 billion) from 2006 through last year, according to Canadian Association of Petroleum Producers data.

Total SA in May cited rising costs in delaying a decision on development of the C$11 billion Joslyn mine, a joint venture with Suncor. The two companies last year canceled their C$12 billion Voyageur oil-sands upgrader. They are still going ahead with the C$13.5 billion Fort Hills mine.

Statoil ASA in September said it would delay work at its 40,000 barrel-a-day Corner oil-sands drilling project.

Projects that recently won regulatory approval are most likely to be considered for delay, Brompton’s Lau said.

Devon plans to make a decision by the end of 2015 on how to develop its Pike project with BP Plc after receiving regulatory approval earlier this year to produce 109,000 barrels a day, Chief Operating Officer David Hager said earlier this month.

‘More Challenged’

“Given the more challenged oil-price environment we’re in right now, we want to make sure we get this absolutely right when we actually go to full development on this,” Hager said.

If oil prices remain low, Canadian Natural Resources Ltd. may decide next year to delay its 50,000 barrel-a-day Grouse project scheduled to start in 2018 or 2019, President Steve Laut said in an interview.

Cenovus will decide next year on its 300,000 barrel-a-day Telephone Lake project, which it’s developing in increments of 45,000 barrels a day, the company said this month.

The blow from cheaper crude is partially offset by a narrower discount for Canadian oil and the weakening of the nation’s currency, which reduces costs relative to revenues in U.S. dollars, said Peter Tertzakian, chief energy economist at Calgary-based ARC Financial Corp.

As more Canadian heavy crude reaches U.S. refineries by rail and expanded pipelines, its discount relative to the U.S. benchmark narrowed to $17.25 a barrel yesterday from a record high of $42.50 in December 2012.

“The companies are still going to be producing oil and trying to find ways to reduce their costs,” said Bob Schulz, a University of Calgary business professor. “New projects are going to take a hit.”

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