Energy Risk Canada: Low crude prices won’t stop oil sands development, experts say

The prospects for long-term development of the Canadian oil sands remain good, presenters at Energy Risk Canada say, dismissing concern about the recent plunge in crude oil prices

Oil prices have slumped recently as the European sovereign debt crisis threatens to reduce global energy demand. That has raised some concern about the viability of developing Canada's oil sands, where petroleum is extracted with a costly mining-like process rather than conventional drilling. But experts at this week's Energy Risk Canada conference dismissed such worries, declaring themselves bullish about the longer-term prospects for development of the oil sands.

"I'm favourably inclined to them. They have a very good position on the cost curve," Colin Fenton, global chief of commodities research and strategy at JP Morgan Chase, told the audience at the conference in Calgary.

The price of West Texas Intermediate (WTI) crude oil futures for July delivery fell about 3% on Wednesday to close at $81.80 per barrel, the lowest level since October.

That is perilously close to the point where oil sands development begins to look unprofitable – in order for a new oil sands mining project to break even, the price of WTI needs to be around $80 per barrel, according to a study published earlier this month by international energy research firm Wood Mackenzie.

But technology has improved in recent years, reducing the cost of oil sands extraction. Moreover, not all oil sands projects are created equal: so-called 'in situ' projects, which extract crude bitumen from the oil sands by injecting steam into the oil reservoir, have a break-even price of $60 per barrel, Wood Mackenzie says.

Presenters at Energy Risk Canada conceded there are still major challenges to the development of the oil sands. One such roadblock is a lack of skilled labour and infrastructure in the remote parts of western Canada where the oil sands are located, said Warren Jestin, chief economist at Scotiabank.

"One of the constraints on development of the oil sands may well be inability of the producers to get labour, the infrastructure with respect to highways, and the like," Jestin said. "So we may well find that a year from now we're not talking so much about the depressed prices effectively turning off the longer-term investments, but the fact you simply can't get the bodies and the infrastructure in place at the speed the market seems to demand."

Opposition from environmentalists and indigenous groups may also block construction of the pipelines needed to get oil from landlocked Alberta to global markets, said Harrie Vredenburg, a professor at the University of Calgary's Haskayne School of Business.

"All those pipelines are going to have significant problems," Vredenburg said.

The lack of transport infrastructure is a major problem for Canadian oil producers. Pipeline bottlenecks currently limit how much oil can get out of western Canada, and the resulting oversupply has led Canadian heavy oil to trade at a steep discount to WTI.

Energy companies have been busy drafting pipeline plans to alleviate the problem, only to be hit with repeated setbacks. Earlier this year, the administration of US President Barack Obama rejected the initial proposed route of TransCanada's Keystone XL pipeline, bowing to objections from environmentalists. TransCanada has since changed the route and resubmitted its application for Keystone XL, which would allow 830,000 barrels per day of Canadian oil to reach the US Gulf Coast.

Meanwhile, two other proposed pipeline projects – Enbridge's Northern Gateway and Kinder Morgan's Trans Mountain Extension – would transport oil from Alberta to the coast of British Columbia, allowing that oil to be exported across the Pacific Ocean to energy-hungry Asia.

That would be a potential game-changer for Canada, which sends the overwhelming majority of its oil exports to the US. But the British Columbia pipelines face strong resistance and could be scuttled by their opponents, Vredenburg warned.

"There are major US-based foundations that are funding environmental groups in Canada, as well as aligning with First Nations in British Columbia, to stop oil pipelines," he said, using the Canadian term for indigenous tribes. "These are very sophisticated campaigns."