The oil price may be up, but oil companies are desperately shelving projects, slashing capital expenditures and laying off workers, and not just in US shale deposits.
One area where oil production is set to rise for years to come is, ironically, one of the highest cost: the Canadian tar sands oil. Oil sands companies that have already sunk money into mines and steam injection wells in Alberta have no incentive to stop operating or building out projects that are already well underway.
Tar Sands Investments
Such capital intensive projects are on the opposite end of the price sensitivity scale from shale, where dozens of rigs have been idled over recent months. Oil sands are operated more like a factory, fleet of trucks or a pipeline, run at maximum capacity to reduce the unit cost as much as possible and service startup debt according to the FT.
The paper reports the Canadian Association of Petroleum Producers last week forecast that western Canada’s output will keep increasing by about 156,000 barrels per day each year until 2020. Growth continues after that but slows to 85,000 b/d a year until 2030. Capital spending by Canada’s oil and natural gas industry will total Canadian $45 billion (US $37 billion) in 2015, 40% lower than 2014 and solely focused on building out existing projects that are too expensive to abandon.
New on the drawing board projects, on the other hand, have stayed there. New projects are projected to need an average Brent crude price of more than $100 per barrel to break even and no one, absolutely no one, is taking a bet on that anytime soon.
Compare that to an average break-even price of $29 per barrel for reserves onshore in the Middle East, $57 per barrel in ultra-deep water and $62 per barrel in North American shale, according to Rystad Energy quoted in a Reuters Commodity Note.
Climate Change Legislation Looms
The industry faces more challenges than just the price of oil. This year the leftist New Democratic Party was elected to govern the province of Alberta after pledging to raise corporate taxes and review oil royalties. Maybe even more of a threat is legislation as a result of fears of climate change.
The Oil-Climate Index shows that medium, sweet synthetic crude from Canada’s Athabasca oil sands generates 767 kilograms of CO2 per barrel, compared with 559 kg for Brent crude from the North Sea – itself hardly a low-carbon product due to the challenging deep water nature of UK’s North Sea oil fields.
The industry is trying to reduce costs and to reduce the carbon footprint of oil sands extraction technology, and if the innovative and entrepreneurial drive shown by US shale firms is any indication, it will undoubtedly make strides in both of those objectives. Even so, climate change legislation could be the killer just as oil prices begin to recover. A study by University College London found that 85% of Canada’s bitumen reserves should remain un-burnt if the world is to avoid the 2 degrees Celsius average temperature rise seen by many politicians as the tipping point number.