Falling Oil Prices and the Effect on the Canadian Oil Sands

Scott Buttinger
November 20, 2017

Submitted as coursework for PH240, Stanford University, Fall 2017

History

Fig. 1: The extent of the oil sands in Alberta, Canada. (Source: Wikimedia Commons)

For millions of years, crude oil has been locked within the sands that abound along the Athabasca River, 300 miles north of Edmonton in Alberta, Canada (see Fig. 1). [1] All this oil once lay below the bed of an ancient sea. As waters dispersed, the oil rose into the sandy areas of the former sea floor and lighter hydrocarbons evaporated, leaving heavier hydrocarbons like bitumen. [1] Over time, nature covered the bitumen-impregnated sands with boulders, clay, gravel, and muskeg, creating the vast deposits of oil sand that we see today. [1] In total, the Alberta oil sands represent nearly 200 million barrels of crude, making it the third-largest proven oil reserve in the world behind Saudi Arabia and Venezuela.

The Rise of Oil Sands Extraction

For years, Alberta's massive deposit sat largely untouched, as mining oil sand was dismissed as a costly, roundabout way to produce oil. [2] However in the late 20th century, with much of North America's low- hanging energy fruit already culled, mining existing oil sand deposits became less expensive than searching for new oil fields or pumping it from deep-water platforms off the coasts of Newfoundland or Louisiana. [2] As a result, multinational oil corporations invested heavily in oil sands extraction, including approximately $116 billion between the years 2000 and 2010. [3] This investment lead to a massive increase in the production of crude from oil sands sources. By 2011, 1.6 million barrels of oil were produced each day, and crude oil production levels are expected to rise to more than 3.2 million barrels per day by 2020. [3]

The Effect of Falling Oil Prices

Canada's oil sands were a prized possession for global energy companies when crude was trading above $100 a barrel. But since prices fell to $50 in 2015 (see Fig. 3), where they have lingered, many of the largest oil sands producers have begun unloading their holdings amid concerns that capital-intensive projects would struggle to turn a profit. [4] As a result, Canada's oil firms are retrenching, with large producers planning little or no further expansion and some smaller projects struggling even to cover their operating costs. [5] As the era of large new projects comes to a close, many mid-sized producers - those with fewer assets and producing less than 100,000 barrels of oil a day in the oil sands - have shelved expansion plans, unable to earn back the high start-up costs. [5]

Fig. 2: Yearly average crude oil price from 1861 to 2014 in US dollars per barrel (Source: Wikimedia Commons) [6]

Future Outlook and Possible Solutions

In recent earnings announcements, major Canadian energy companies Suncor and rival Cenovus Energy Inc. said they can now sustain oil sand production with crude at $40 a barrel. [4] While that's not yet near the economics of shale producers in Texas, where the break-even price can be as low as $25, additional advances on the horizon could make oil sands production even more efficient. [4] For instance, companies are experimenting with injecting solvents such as propane into reservoirs to recover more of the sticky crude, and running tests that use radio waves, instead of steam, to heat the sand so oil can flow to the surface. Companies are also trialing driverless trucks that use GPS systems and lasers for navigation in an attempt to to reduce the cost of expensive labor at extraction and refinement sites. [4]

Furthermore, oil sands production is bolstered by a key advantage over alternative oil extraction methods: longevity. Many of the oil sand deposits hold at least 50 years of oil, while the shale wells that are utilized elsewhere in the world tend to exhaust themselves within months. [4]

Conclusion

Though a continued decline in crude prices could severely damage the industry by deterring further investment, oil sands production is unlikely to decline given the enormous time, effort, and money that has been contributed thus far.

© Scott Buttinger. The author warrants that the work is the author's own and that Stanford University provided no input other than typesetting and referencing guidelines. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.