Saudi Arabia’s long game for international crude oil prices will leave Canada’s tar sands/oil sands production uneconomic for at least the next three to five years—and perhaps permanently, according to Bloomberg energy analyst Julian Lee.
“The war on high-cost oil is won,” Lee asserts, after the Organization of Petroleum Exporting Countries (OPEC) realized that in order to keep “oil at US$100 a barrel, OPEC (which really means Saudi Arabia) would have had to keep cutting supply to maintain prices. As [Saudi Energy Minister Khalid] Al-Falih said in London, if OPEC had cut output in November 2014 to support prices, it would have had to do so again in 2015 and 2016.”
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Instead, OPEC’s production has risen by 2.4 million barrels a day, and “$60 a barrel may well be where Saudi Arabia is comfortable seeing oil prices end up,” the analyst suggested, citing a Saudi Aramco director who attended a London, UK conference earlier this month where Al-Falih spoke.
The shift is reflected in “an almost total halt in big new conventional oil projects,” Lee observes, with only the “best projects” being funded. More expensive plays such as deepwater frontier exploration aren’t making that cut.
In a scenario where only the lowest-cost reserves are developed, however, Canada’s unconventional tar sands/oil sands would seem to be decisively out-priced even by deepwater fields, according to a chart accompanying Lee’s comments.
It estimates the capital cost per “daily barrel of capacity” of the Canadian sands at US$95,000 to $115,000, significantly higher than every other crude resource type examined, and between $20,000 and $54,000 more expensive than deepwater fields off West Africa. The additional operating cost of producing Canadian synthetic crude—at US$25 to $30 per barrel—is also the highest of all the major world crudes; even West African deepwater crude has lower operating costs to produce, by between US$18 and US$25 per barrel.
The outlet’s conclusion bolsters one reached two years ago by the Natural Resources Defence Council, which argued in mid-2014 that crude derived from tar sands/oil sands bitumen was “more economically marginal” than many analysts believed.
