Producers of so-called unconventional fossil energy—gas and oil extracted from hard shale or sticky tar sands/oil sands—need the price of conventional crude oil to stay above US$50 barrel “for their investments to pay off in the long run,” Bloomberg reports, citing a Moody’s Investors Service study of 37 U.S. and Canadian operators.
Both U.S. shale oil drillers and Canadian tar sands/oil sands producers “have made dramatic efforts to cut costs since the collapse of oil prices three years ago,” the news agency reports, “with many delivering higher dividends to investors this year.”
“But with limited wiggle room to reduce costs further, any improvement in their ability to sustain healthy returns will have to come from commodity prices,” Moody’s concludes.
The two unconventional sectors face somewhat different challenges, however. Shale producers “are creatures of the capital markets,” hedge fund manager Jim Chanos told Bloomberg. “Because the wells deplete so quickly, they constantly need to raise money to replace the assets.”
By contrast, facilities to extract and upgrade bitumen demand the up-front commitment of billions of dollars in capital, betting that prices will remain high enough for the decades it will take to pay down the initial cost.
Benchmark global oil prices, compared to which Canadian synthetic crude sells at a discount, have recently hovered just above the critical $50 threshold, but most market watchers see that achievement as fragile. As The Mix went to virtual press, crude oil was selling for US$51.88 a barrel at the Cushing, OK, distribution hub.