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Oil Glut

October 17, 2014

The price of oil has declined rapidly since the start of the year. Production from the US continues its upward trajectory, courtesy of shale oil fracking and horizontal drilling techniques. Oil falling below $80 is a very real possibility. For Alberta’s oil sands project economics are becoming much less attractive.

According to BMO Nesbitt Burns, it takes oil at $90 a barrel, on average, to develop and operate oil sands mines profitably, though well-established projects can run at much lower prices. All-in costs for steam-driven projects, which comprise most new developments, average $65 a barrel.

Reduced prices means reduced cash flow and less incentive to invest. There are dozens of projects in the oil sands that have been announced, in application (before the regulator) or approved that await an investment decisions.

In May, Total and partner Suncor Energy Inc. decided to indefinitely defer their $11-billion Joslyn North mine in Alberta because the economics just weren’t good enough. Total’s experience in the oil sands highlights two things: how difficult and costly the region can be for oil producers; and how energy companies are now more willing to cut their losses or more carefully develop projects.

Total and Suncor last year cancelled plans to build the $11.6-billion (Canadian) Voyageur upgrader. This meant the French company booked a loss of $1.65-billion (U.S.) in the first quarter of 2013. Total sold its stake in the project to Suncor for $500-million.

Commentary

The massive increase in US production is the main factor for oil prices trending lower. Alberta oil sands projects, particularly new investments, will be scaled back at prices around $80 for WTI. The overheated Ft.McMurray economy will slow down if capital spending declines.

Sources

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Source: Wall Street Journal.