Dominion, A&P, Gordon, Frank...gone

The oil sands falls prey to its success

JASON KIRBY August 25 2008
Dominion, A&P, Gordon, Frank...gone

The oil sands falls prey to its success

JASON KIRBY August 25 2008

The oil sands falls prey to its success

JASON KIRBY

Could Alberta’s booming oil sands sector become a victim of its own success? Last week, Canadian Natural Resources, one of the largest independents in the oil sands, reported a second-quarter loss and said its Horizon oil sand mining project is 36 per cent over budget due to higher costs. Meanwhile, Imperial Oil delayed a decision on its Kearl oil sands project amid legal squabbles and, again, rising costs. Now oil prices are falling, and the economics of

some projects are coming into question.

“The worst possible scenario is you build your project in a world of $135 oil, and you have to sell it for $70,” says Raymond James oil sands analyst Justin Bouchard. “If oil is going to keep sliding those will be the projects affected the most.”

Granted, a one-month decline in oil prices, from $147 a barrel to $116, must be viewed in the context that some projects will take

10 years to build, and operate for another 50. And the recent price drop may just be a pause before crude marches higher. Yet it does highlight how much the economics of the

011 sands have changed during the oil boom in Alberta. For years it was said that for the oil sands to be viable, the price of crude had to stay above $35 a barrel. When oil prices fell below that level in the 1980s, many projects were scrapped or put on hold.

But soaring steel and natural gas prices, as well as a tight labour market, mean the breakeven point is now much higher. Bouchard pegs it at around $70 a barrel, while Greg Stringham at the Canadian Association of Petroleum Producers says it’s as high as $85. “People say, ‘Even if the cost is $85 they must still be making a ton of money,’ ” says Stringham. “If the companies were producing today that would be correct—but most are still in the construction stage.” The question now is, if costs continue to rise while oil prices fall, how many mines will actually be built? M