As Oil Prices Drop, Canadian Oil Sands May Be Wasted Investment

A new study says the recent increase in global oil production and the ensuing drop in price may threaten the profits of energy companies that have invested in Canadian oil sands, the world’s most expensive extraction operation.

The think tank Carbon Tracker Initiative (CTI) of London reported Aug. 15 that it simply doesn’t pay for companies to drill for oil in deep-water projects such as those off the coasts of Africa and South America, unless their oil can sell at between $115 and $127 a barrel.

Even riskier financially are the oil sands, or tar sands, of western Canada, which are profitable only if crude prices are as high as $150 a barrel, CTI said.

Yet as recent conflicts die down in key oil-producing regions, production is remaining steady and in some cases improving, and the average cost of oil is now hovering around $100 a barrel. This optimism may soon fade, but in the longer term, the United States has been extracting oil at record levels, generating even more supply.

As a result, some oil companies that invest heavily in oil exploration could end up losing money, according to CTI. It reported that major oil companies are on a track to spend fully $548 billion over the next decade to extract crude worth only about $95 per barrel. It said more than half of this investment, $357 billion, is in projects that are costly, such as oil sands and deepwater drilling.

Cancellation or deferral of the expensive projects “is becoming increasingly necessary as near-term cash flows are not sufficient to maintain both dividends and capital expenditure plans,” the CTI report concluded.

That’s true only up to a point, according to some industry observers. David McColl, an analyst at Morningstar Inc. in Chicago, told Bloomberg News that oil sands projects may be expensive to develop, but once they’re established they can produce oil for decades longer than similarly expensive efforts, including deepwater wells.

McColl’s attitude is that slow and steady wins the race. “Where else can you get 10 to 30 years of predictable cash flow?” he asked. “The returns may not be stellar compared to some other projects, but they are steady.”

CTI said it based its conclusions on data from Rystad Energy, a research and consulting firm in Oslo. Carbon Tracker singled out 20 substantial oil projects that are expected to cost a total of $90.7 billion but that it said probably should be canceled because most of them couldn’t even break even unless the average price of oil was at least $110 per barrel.

Of these projects, CTI said, 16 are deepwater wells or oil sands initiatives.

“This capital [invested in these costly projects] could instead be returned to shareholders rather than being put at risk in projects that are already high cost and low return,” CTI concluded.

By Andy Tully of Oilprice.com