Could there possibly be anything more out of favor today than the Canadian oil sands? It is virtually impossible to think of anything these oil deposits have going for them.
A decade ago we were all glad we could count on the oil sands in the coming decades as we grew concerned about surging Chinese oil demand and questions about OPEC’s ability to grow production causing significant global oil shortages.
Today with an apparent glut of oil and a depressed WTI price it is starting to seem like we don’t need the oil sands. Environmentalists and President Obama have made it clear that many of us don’t want them either.
The future of the oil sands does not look bright.
At Current Oil Prices They Are Uneconomic
Existing oil sands assets that are already in production are going to keep producing. These projects have billions of dollars invested in them and they need to generate whatever cash flow they possibly can.
New oil sands projects however are not going to happen simply for economic reasons at current oil prices. As most investors know the oil sands is the high cost source of oil. No high oil prices, no oil sands.
Here are the breakeven prices for the various types of the major new oil sands projects.
The very lowest cost project is breakeven at $68 per barrel. That is the breakeven price.
Companies don’t invest billions of dollars to breakeven. To feel comfortable that sufficient profits can be earned from capital deployed companies aren’t going to be pumping billions into new oil sands projects unless $100 per barrel oil is likely going forward.
Does anyone have real confidence today that we can count on $100 per barrel oil going forward? The current price is $38 and we now know that OPEC can no longer be relied on to prop the price back up.
The funny thing about low oil prices though is that they tend to be followed by higher oil prices. That is how the industry works.
From 2010 to 2014 we had sustained high oil prices. That led to unprecedented levels of borrowing by oil producers and spending on development. The level of development spending dropped significantly in 2015 and will continue to drop until oil prices recover.
That will eventually take care of that particular problem that the oil sands have. The second problem however, seems more permanent in nature.
Society Doesn’t Want The Oil Sands Developed
Even if the price of oil does head back to where it was for much of 2010 through 2014 there are still serious roadblocks in the way of future oil sands development.
The oil sands are after all the primary reason that President Obama denied the Keystone XL pipeline.
With the world taking climate change more seriously each and every year the oil sands have become a primary target of the environmentalists. A study done by Deborah Gordan called “Know Your Oil” which was referred to by GMO’s Jeremy Grantham in his widely read letter details how much worse the oil sands are than other oil projects.
Gordon found that when used, the heavier oil from the oil sands releases only ten to twelve percent more CO2 than the average oil. But that counts only burning the product. When you also factor in the process of developing the oil sands which includes clearing the forest, squeezing out the oil and refining it, the oil sands release 40% more CO2.
That is significantly worse and why the oil sands are neck and neck with ISIS as public enemy number one.
Can companies really commit to spending tens of billions of dollars on new oil sands projects if there is a very real threat that environmental focused Government policy might shut them down?
It seems very likely that the environmental movement could spell the end of oil sands development.
But what we have to remember is that tomorrow might look a lot different than today. Ten years ago few people believed that the world could ever get a meaningful amount of oil from shale rock. Not only did the industry crack that code, it flooded the world with shale oil.
Necessity is the mother of invention.
It is entirely possible that new techniques and technologies that can make oil sands production environmentally friendly will give the oil sands a new life. The industry is busy trying to do that each and every day. One example of this is MCW Energy Group (TO:MCW) which is experimenting with an oil sands development technology that is environmentally friendly and lowers the cost of production. That company is 100% dedicated to finding a better mousetrap for oil sands production.
The big oil sands producers like Imperial Oil (TO:IMO) and Suncor (N:SU) are working every day to try and do the same thing.
The monetary incentive for someone to come up with an environmentally friendly way to develop the oil sands is astronomical. That tends to really expedite the time it takes to bring new solutions forward.
The evolution of American shale oil might provide a good example of what could happen for the oil sands. The fact that oil was trapped in shale rock like in the North Dakota Bakken was known for decades. It wasn’t until the last decade when oil prices started rising was there truly the incentive for the industry to really attack the problem.
Without someone coming up with a more environmentally friendly way to develop the oil sands there is a real risk that they become stranded assets.
The death blow to how the oil sands currently operates isn’t likely to come from the price of oil, it is likely to come from a carbon tax specifically aimed at the oil sands and coal.
The prize for someone to develop a clean oil sands development method is huge. We will have to wait and see if that can incentivize a solution to oil sands pollution problem.