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Have the Canadian Tar Sands had their Day?

By Dave Cohen | Tue, 02 April 2013 22:56 | 1

Is Canada's tar sands expansion in trouble? Probably not, but the issue is complicated, so bear with me.

Back on November 9, 2012 I wrote a post called A Slowdown At The Tar Sands, noting that the economics of new projects had become "challenging" according to James Burkhard, head of oil-market research for oil consultancy IHS Cera. Bloomberg recently reported on a new development at the tar sands which confirms that diagnosis.

Total SA (NYSE: TOT), Europe’s third-biggest oil company, will book a $1.65 billion loss in the first quarter on the canceled Voyageur Upgrader project in Canada’s oil sands after selling its stake to Suncor Energy Inc. (NYSE: SU)

More than $5 billion of investment in Voyageur over the next five years is “no longer justified from a strategic and economic point of view,” the Paris-based company said in a statement. The explorer will sell its 49 percent stake in the project to venture partner Suncor for $500 million.

Alberta oil sands are beset by rising labor costs and a shortage of workers as well as a discount for the price of Canadian heavy crude as U.S. oil output exceeds expectations. Suncor yesterday canceled the Voyageur venture after Chief Executive Officer Steve Williams said in December the profit margin for processing Alberta bitumen was “disappearing.”

Total’s decision to sell its stake “is the right one and made due to negative market conditions,” Oswald Clint, an analyst at Sanford C. Bernstein & Co., wrote in a report. It demonstrates “some level of capital discipline when project economics are no longer favorable.”

What does new tar sands oil cost in per-barrel terms? In short, how high must oil prices be to make the economics favorable? Here's a mining.com report from December 14, 2012.

Bitumen is expensive to extract, upgrade and refine and cannot compete with the many new shale oil plays which have pushed US production to its highest level in a decade.

Unlike oilsands oil, Bakken trades broadly in line with to WTI and the region is also competing for pipeline and refinery contracts with Alberta.

Apart from the boom in US production and a strong loonie – as the Canadian dollar is referred to by locals – Alberta's oil sands players are also threatened by escalating labor and equipment costs.

A recent report by research house Wood Mackenzie shows break-even costs for building new steam-driven [in-situ] projects is in the $65 – $70 a barrel range.

Mining developments – the truck and shovel method accounts for a fifth of all projects – need at least $90 – $100 oil.

Existing projects in Alberta can still make money at $45 a barrel.

Existing projects are not threatened, but new projects are. And here's a Globe & Mail report from June 4, 2012.

“Oil sands projects display some of the highest break-evens of all global upstream projects,” the firm said. “The potential for wide and volatile differentials could result in operators delaying or cancelling unsanctioned projects.”

Related article: Is There Any Way to Win the Tar Sands Debate Given all These Spills?

New oil sands mines, for example, require prices of around $80 (U.S.) a barrel to break even, Wood Mackenzie found.

Add an upgrader, the “pre-refinery” that transforms heavy oil into a lighter crude that can be further refined into diesel and gasoline, and the needed break-even rises to above $100.

So-called “in situ” projects, which use wells and underground steam injection to extract oil sands crude, are less vulnerable, with a break even of about $60.

These mining breakeven prices are very high. Right now, WTI crude is trading at about $97/barrel and Brent is trading at about $111/barrel. New mining developments, including an upgrader, have a breakeven of about $100/barrel, which makes the economics very marginal indeed.

Some tar sands oil trades at a discount to WTI and thus Brent, which means that you can't get the benchmark price for it. This March 26, 2013 Reuters report tell us what Canadian crudes are selling for lately.

Canadian oil prices rose to the highest levels in more than five months on Tuesday in thin trading on strengthening demand and delayed new supplies.

Western Canada Select [WCS] heavy blend for May delivery last traded at $14.75 per barrel below West Texas Intermediate [WTi] according to Shorcan Energy Brokers. That compares with the settlement price on Monday of $16.40 below the benchmark.

Synthetic crude from the oil sands for May delivery last traded at $7.50 above WTI. Synthetic settled on Monday at $6.50 above the benchmark.

Prices for both crudes are the highest since October 12 and come as asphalt demand rises at the start of the summer paving season, increasing the use of heavy oil.

As well, synthetic supplies in May could be constrained by a planned maintenance shutdown at Suncor Energy Inc's 100,000 barrel per day Upgrader 1 unit at its northern Alberta project site expected to be carried out in the second quarter.

Heavy WCS, which is used to pave roads, trades at a considerable discount to WTI, while synthetic crude oil [SCO], which has been mined and upgraded, is currently trading at $6-7/barrel above the WTI benchmark, which is only a few bucks more than it costs to produce.

You don't have to be a rocket scientist to see that new mining projects requiring upgraders are not economically viable at current oil prices. That's why Total Chief Executive Officer Steve Williams said in December that the profit margin for processing mined Alberta bitumen was “disappearing.” However, in-situ production remains viable at current prices and likely future prices, as I will explain below.

In a related development, the U.S. State Department recently issued a report which gave the go-ahead to the Keystone XL pipeline. Needless to say, this finding made environmentalists apoplectic, as reported in The Guardianon March 2, 2013.

Green activists and climate change scientists have slammed a new report from the Obama administration that raises no serious objections to building a massive and controversial oil pipeline...

Michael Brune, executive director of the Sierra Club, said he was "outraged" by what he described as the administration's "deeply flawed analysis and what can only be interpreted as lip service to one of the greatest threats to our children's future: climate disruption".

The State Department report concluded that the environmental costs of getting oil from Canada to the Gulf by other methods were more harmful to the environment. It evaluated two options using rail: shipping the oil on trains to existing pipelines or to oil tankers.

Related article: Total Dumps Canadian Oil Sands Project for $1.65bn Loss

The report said these methods would release more greenhouse gases than the pipeline.

Obama is under strong pressure from the oil industry, business groups and the Canadian government to approve the project, which will open new outlets for the vast crude reserves of Alberta...

Here's the key paragraph in The Guardian story.

"The State Department is overlooking the fact that the pipeline is likely to trigger at least 450,000 barrels per day of additional tar sands production capacity," said Stephen Kretzmann, executive director of Oil Change International, in a statement.

Will the Keystone XL pipeline trigger 450,000 barrels-per-day of new capacity? Not if mining + upgrading is involved, as I've made clear above.

However, in-situ production using steam-assisted gravity drainage, where operators steam-heat bitumen which lies 200-400 meters under the ground to convert it to heavy crude oil, remains economically viable with a breakeven price of about $60/barrel, though it is not without problems.

According to a Scientific American report The Opposite of Mining: Tar Sands Steam Extraction Lessens Footprint, but Environmental Costs Remain, in-situ production surpassed mining production in 2011. In fact, "In 2011, Alberta's production of crude bitumen reached over 1.7 million barrels-per-day; of this surface mining accounted for 51 percent and in-situ for 49 percent. In 2011, about 57 percent of crude bitumen production was sent for upgrading to SCO in the province."

Producing in-situ oil emits more CO2 than mining bitumen does.

The ultimate engineering challenge of the tar sands, however, may be coping with greenhouse gases. As a result of increasing in situ production, greenhouse gas emissions from Alberta's tar sands rose by 1.7 percent last year, and are up 16 percent since 2009, according to the Canadian Association of Petroleum Producers. The newly dominant in situ technology produces oil at a cost of 2.5 times more CO2 emitted to the atmosphere than the more brute-force, conventional mining. Whereas this may be equivalent to what's emitted when using steam to flood out heavy oils in California or Nigeria, neither of those sources of greenhouse gases is growing as fast as the tar sands.

So, is Canada's tar sands expansion in trouble? Yes and no. New mining projects have poor economics, but the trend toward more in-situ production will likely continue, especially if the new pipeline is approved. And as theScientific American report makes clear, in-situ technology is improving all the time. And what about the energy costs of producing stream-heated crude?

The key to in situ production is the steam/oil ratio which indicates how many barrels of steam it takes to produce one barrel of oil. This metric is important because it determines the level of emissions generated, operating costs, surface footprint size, capital efficiency, water intensity and water usage. At Christina Lake, Cenovus' SOR is around 2:1, which means they use about 2 barrels of steam to extract 1 barrel of oil, which reportedly leads the industry according to IHS data...

The steam is generated from burning natural gas in huge industrial boilers which accounts for a significant portion of an operation's capital costs.

So it's important to closely monitor steam input volumes to ensure the vaporized water is reaching the targeted oil sands reservoir, or pay zone. Greg Fagnan of Cenovus explained that their Produced Water to Steam Ratio (how much of the steam you inject in the ground comes back as produced water) is about 1:1 and they know something is wrong if this diverges, which likely means some of the steam is being lost to a pocket of gas or water known as a "thief zone." Ideally the Produced Water to Steam Ratio should be 1 barrel in 1 barrel out.

Although energy from natural gas is "a significant portion" of an in-situ operator's capital costs, the breakeven price of producing oil this way is still only about $60/barrel. The cheaper gas becomes, the more favorable the economics will be.

Thus it appears that "business-as-usual" will continue at the tar sands, especially if the Keystone XL pipeline is approved, which would create an additional incentive to produce in-situ oil at the tar sands. Once again, human technological cleverness has postponed a "peak oil" catastrophe at the cost of doing great damage to our Earthly environment.

More and more, that's exactly how I expect things to play out in the future.

By. Dave Cohen

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  • Burt Irving on April 04 2013 said:
    If you really take the time to drill into the cost variables you would realize that you're break-even levels for new projects and mining are way too high.

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