Story by Pamela Heaven, Financial Post. Contrary to popular belief, Canada’s oilsands may be the “last barrel standing” as the world shifts away from fossil fuels, says a report from the C.D. Howe Institute.
The study, by Kent Fellows of The School of Public Policy at the University of Calgary, goes against the accepted narrative that the oilsands would be too expensive to maintain if global oil demands should fall.
Instead, its findings show that nearly all oilsands producers will continue as long as the price of Western Canadian Select (WCS) remains above $40 per barrel, while conventional producers in the U.S. and OPEC would require higher prices.
“The analysis … forms a strong argument that legacy oilsands production is more resilient in the face of potential global demand reductions than is commonly understood,” said Fellows.
“In fact, it is possible that we will see production declines from large international state-owned oil producers — specifically, coordinated reductions by members of the Organization of Petroleum Exporting Countries (OPEC) — before we see reductions in existing oilsands production.”
The difference is in the method of extraction and cost structure of oilsands projects. Oilsands bitumen is extracted by two methods. When bitumen is close to the surface, it is dug out with heavy equipment and trucked to a processing facility.
When deposits are deeper, high-pressure steam is used to heat the bitumen so it becomes fluid enough to be collected and brought to the surface.
Both methods require higher upfront capital investments than building a conventional oil well. But once these investments have been made, oilsands projects are able to maintain or even increase, production over several years or decades with relatively small marginal costs per barrel says the report.
On the other hand, the productivity of the conventional oil well falls much faster over time, and requires new annual capital investments to maintain production.
Because of this, the oilsands can weather short-term price dips as long as the WCS price doesn’t stay below $40 a barrel persistently. Conventional oil producers generally stop or slow investments in production when the West Texas Intermediate (WTI) price is below US$45.
It’s true that oilsands and conventional wells produce different products. Bitumen is more costly to refine and transport than lighter crude and the report factors in these extra costs.
While low crude prices might not entice oilsands producers to start new projects, it is in their best interests to keep producing at existing operations because the upfront investment has already been made, Fellows said.
The study found that nearly all oilsands producers would continue to produce and perhaps marginally expand with WCS at $40. Most would continue to produce as long as the price stayed above the $25-$30 range, and some would continue even if prices fell as low as $15 to $20.
The bottom line, the report says, is that Canada cannot rely on weakening global oil demand to reduce its emissions footprint. Reductions in the oilsands will have to come through reducing emissions intensity or policy that enforces production cuts.
“One thing seems clear: market forces will not eliminate legacy oilsands production before other sources. There is a reasonable argument that, if there is a last barrel of oil produced in North America, it will come from an oilsands operator unless government policy decides to actively forgo that economic opportunity,” said Fellows.