- The Writer holds an MSc in Eurasian Political Economy & Energy from King’s College London and also an MA in European Studies from Sabancı University.
Following the collapse of oil prices in 2014, oil sands producers in Canada have faced many challenges. The steady increase in extraction costs along with increasing environmental pressures as well as difficulty in reaching new markets because of opposition to new pipeline projects have all kept investors away. Extraction from Canadian oil sands, once the darling of global investors and oil supermajors has become an increasingly costly, slow and complicated process.
Given the high costs of production and transportation in which technological innovation is used to blend bitumen with diluent to minimize the environmental impact and reach markets thousands of kilometers away, the future of Canadian oil sands looks questionable.
The recent $25 billion sell-off and withdrawals from high costs oil sands by major oil companies such as Conoco Philips, Shell, followed by Total and Statoil, marked a slowdown in capacity construction. Major oil companies are anticipating a gloomy outlook and have decided to move away from investing in oil sands and have diverted their investments to other global opportunities.
Canada currently produces 2.7 million barrels per day (/d) of oil sands. During the boom years between 2000 and 2015, approximately 2 mb/d of production was added to the total production. Canada’s current oil potential is estimated to be around 339 billions barrels, of which 90 percent was derived from oil sands. In the Alberta province alone, one in every 16 jobs is related to oil sands production, and in 2014 oil sands brought 70 billion CAD to the Canadian economy. As a result, the current low oil price environment is continuing to have a severe impact on the future of the Canadian oil sector and its economy.
Oil prices hovering around $50 or $60 will no longer attract major investments to the Canadian oil industry. Given that the era of three-digit oil prices is no longer possible, at least in the foreseeable future, the uphill battle for oil sands is likely to become tougher should oil prices reach minimum levels of $80. In 2015, the Canadian Association of Petroleum Procedures predicted that Canada would be able to produce 6.4 mb/d by 2030 and a year later, this projection was revised down to 5.4 mbd, projecting a slower growth in the long term.
Canada has been exporting almost all of its oil to the U.S. market, particularly to the Gulf Coast and the northeast of the U.S. Canada’s market share has started to decline over the years after the oil glut in the U.S. with shale production. With the decline of Venezuelan heavy oil production in recent years, and in spite of a grey oil price outlook, Canadian oil sands have somewhat enjoyed a relative boost. However, this temporary increase in demand is not sufficient to rejuvenate the oil sands industry in the long-term.
For the feasibility of capital-intensive oil sands projects and to obtain a final investment decision, most experts believe that an oil price recovery is needed. For attainable oil sands projects, many industry experts suggest that oil price should range between $80 and $100. Experts also believe that to revitalize the oil industry in Canada, other fundamental changes are also needed. Improvements in reservoir productivity and production processes are required to maximize overall production. The re-evaluation of royalties, carbon pricing and environmental impacts - usually included in regulatory costs that stem from production and processing are also recommended. If advances are made in these areas, it would help oil sands production get back on its feet with the lower cost of production and operational costs.
Finding capital for new oil sands projects is more difficult compared with a decade ago when many companies wanted to expand their capacity. Since 2014, in particular, new projects have come to a halt. Given the uncertainty surrounding the future of the industry, much of the capital spent before the oil price collapse is aimed at sustaining the current level of production with no desire for expansion. With the help of new techniques, such as steam assisted gravity drainage, oil sands producers will be able to reduce their overall production costs and overcome management difficulties.
Given the challenges that Canadian oil sand producers have to endure, the future prospects for the oil sands industry look unfavorable at least in the short term. With the help of technological breakthroughs that would allow for improved extraction of once unrecoverable oil sands, along with political and economic stability and greater efficiency and environmental standards, the current hurdles could be overcome. However, this is based on the condition that the oil price recovers and projects on hold are restarted.
- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy.