New Report Finds Oil Sands Production Costs Below U.S. Tight Oil

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Canada’s oil sands are often thought of as one of the world’s most expensive, marginal sources of crude. That may not be the case, however, according to a new report by Scotiabank Economics. After examining more than fifty plays across Canada and the United States, the report found that, on average, Canada has lower full-cycle breakeven oil production costs than the United States. Moreover, the report found that the oil sands have lower associated production costs than the “light, tight” crude from American shale that is upending the North American oil market.

On average, Canadian oil production was found to have an average full cycle breakeven cost of between $63 and $65 per barrel as compared to the U.S. average of $72. These breakeven costs were calculated by determining the price of West Texas Intermediate benchmarked oil required for a given project to yield a 9 percent after-tax return on full-cycle costs.

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Crude Oil Cost Curve

Full report can be found here. Individual plays deviated from this average, however. Of the plays producing a significant volume of oil, Southwest Saskatchewan Bakken came in with the lowest break-even cost of $44.30 per barrel. Averaged over aggregate production, the Eagle Ford, U.S. Bakken, and Permian Basin plays clocked in with $63.57, $69, and $81 per barrel break-even costs, respectively.

Most importantly for the oil sands — and dispelling the high-cost myth surrounding them — the full-cycle break-even cost of in-situ, steam-assisted gravity drainage (SAGD) bitumen is $63.50, lower than the light, tight American crude that has been receiving so many headlines as of late. SAGD bitumen production currently accounts for 1.08 million bbl/d, 46 percent of aggregate oil sands production. Furthermore, it is expected to represent 75 percent of the 1.2 million bbl/d growth projected by 2020.

Oil sands mining and upgrading (M&U) projects are a bit more of a mixed bag. Existing M&U projects have a relatively low break-even cost between $60 and $65 per barrel; new projects, however, were found to require $100 per barrel to break even. This helps explain the predicted dominance of SAGD bitumen production in the growth of the next decade.

The cost competitiveness of the oil sands “partly reflects royalty credits in Canada, but is also a testimony to the effectiveness of the R&D & technology brought to bear in developing the Alberta oil sands,” writes Patricia Mohr, the report’s author and vice president, economics, and commodity market specialist at Scotiabank.

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The oil sands also have stability; we know where the Athabasca oil sands are and how much oil they hold. This gives the oil sands a competitive edge over tight oil production. The rapid decline of tight oil wells makes it difficult to justify multi-billion dollar fixed pipeline infrastructure; within a few years, a well’s productive prime could be behind it. The EIA estimates that simply maintaining production at 1 million barrels per day in the Bakken requires 2,500 new wells per year. The Athabasca oil sands, on the other hand, will be producing for decades to come, making future production more predictable and expensive infrastructure investment more palatable.

Despite all the fanfare being heaped upon U.S. tight oil production, this is likely a short-lived phenomenon over the broader stroke of history. While tight oil is racing ahead now, it is likely that the competition between Canada’s oil sands and America’s shale will resemble the story of the tortoise and the hare — and we all know how that ends.

Originally written for OilPrice.com, a website that focuses on news and analysis on topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.

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