A half-dozen Canadian tar sands/oil sands producers—including Suncor, Canadian Natural Resources, and Husky Energy—are stuck in the middle of billion-dollar development projects that won’t be profitable with Canadian oil selling as low as US$30 per barrel.
Bloomberg calls it “the last place oil producers want to be when prices plummet to profit-demolishing lows.” But “while all around them projects have been postponed or cancelled, their investments were judged too far along when the oil game suddenly moved from offence to defence.”
The new projects will increase Alberta’s oil production by 25%, adding at least 500,000 barrels per day to a saturated North American market by 2017, according to portfolio manager Rafi Tahmazian. Oil has been selling in the US$40 to $50 range, and “even $50 might appear optimistic now,” Van Loon writes, with analysts like Citigroup forecasting prices in the low $30s. As a rule of thumb, tar sands/oil sands projects generally need US$80 per barrel to break even.
Cenovus Energy and others have postponed or cancelled projects where they could. But other projects are too far advanced. “Operators can more easily suspend projects in the ‘front-end’ engineering phase, after which it becomes more painful because the money already in the ground produces zero return,” Van Loon explains, citing analyst Sam Labell. “If a company has capital available, it will tend to press ahead,” even if profits suffer.
The net result is that the industry is hurting badly, he notes. “Returns on capital invested by Canada’s largest oil-sands producers reached 20% at some points over the past five years, according to data compiled by Bloomberg. That figure is now closer to zero or negative for companies such as Athabasca Oil Co. and Cenovus.”