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Canada’s Oilsands Face ‘Death Spiral’ If They Don’t Cut Costs


As the world’s oil glut continues to build, wiping out hopes of a price recovery, the head of one of Canada’s largest oilsands operators is warning the industry faces a “death spiral” if it doesn’t figure out how to cut costs.

Speaking before the Chamber of Commerce in Fort McMurray, Steve Laut, president of Canadian Natural Resources Ltd. (CNRL), said oilsands companies can still return to health, but only if they aggressively begin to cut costs.

Costs have risen so far, so fast that oil producers were making three times as much profit in 2004, when oil was at $40 a barrel, than they were a few years ago when oil was at $100 a barrel, Laut said, as quoted at the Globe and Mail.

Laut’s call for cost cutting may be seen by some as a prelude to layoffs and project cancellations, but so far North America’s oil industry is largely maintaining production levels.

BMO economist Sal Guatieri put out a chart Friday showing employment levels in the U.S.’s two largest oil patches — Texas and North Dakota — continued to rise at the same pace in December as before the oil price collapse.

bmo oil jobs

“In North Dakota, payrolls in this sector towered 30 per cent above year ago levels in December, while those in Texas rose 12 per cent,” Guatieri wrote in a client note.

That is “great news for the U.S. economy … though not for anyone hoping for a quick rebound in oil prices and the loonie (say, Albertans or Canadian travelers to the States).”

Laut’s own company continues to do the same — it projects its oil output to grow 7 per cent this year, though that is a slower pace than it had previously anticipated.

Meanwhile, the global oil glut continues to build, with the U.S. Energy Information Administration reporting that U.S. crude oil supplies hit a record high, once again, last week.

Energy broker Peter Donovan told the Wall Street Journal it’s “just crazy” how supplies continue to build. He said the market will continue to see “downward pressure” on oil prices so long as supplies keep building up.

CNRL’s Laut forecasts that oil will remain for some time in the $60 to $75 range. That’s actually below the cost of extracting a barrel of oil from a new oilsands project, which is somewhere upwards of $80 per barrel. The least expensive oilsands fields have production costs around $51 a barrel.

Prices for Western Canadian Select oil were hovering around $47 a barrel on Thursday.


13 Comments on "Canada’s Oilsands Face ‘Death Spiral’ If They Don’t Cut Costs"

  1. Plantagenet on Sat, 21st Feb 2015 4:52 pm 

    The oil glut is gong to drive some energy companies into bankruptcy. A diversified company with holdings in the Canadian tar sands should be OK, but small “pure” players in the tar sands are going to get wiped out.

  2. dave on Sat, 21st Feb 2015 5:09 pm 

    Sorry Plant the Canadian tar sands face a number of both short and long term problems. Lots of articles now on what I’ve expected for months. A key short term factor to look at imho will be the price of crude in late April and May ,when activity should pick up as a response to weather. Longer term both renewable and non-renewable energy sources will pound the lights out of these deposits. Just watch the action of the Canadian dollar,, just loonie ain?

  3. Dredd on Sat, 21st Feb 2015 5:34 pm 

    Destroying civilization with oil pollution is expensive these days.

  4. GregT on Sat, 21st Feb 2015 7:35 pm 

    Destroying civilization? More like mass genocide. Love the Dredd blog by the way!

  5. rockman on Sat, 21st Feb 2015 9:42 pm 

    It’s going to be interesting to see how lower oil prices will affect changes in both the oil sands and the shales. High oil prices led to high demand for equipment and skilled personnel. And that led to significant inflation in total costs. Less oil sands/shale development will led to severe competition among suppliers which will led to lower development costs.

    So how will the cost vs activity balance? An Eagle Ford driller might be getting 50% of the former price of oil. But what if the cost to drill/frac the same well a year ago drops 50% this year? Of course fewer wells will be drilled but the decrease might be less then some anticipate. And operators with the better sweet spots might see similar (and perhaps slightly better) profit margins in the near future.

    I won’t make a guess about the EFS. At least not right now: the change in the pricing dynamics is far from reaching equilibrium at the moment IMHO.

    And the oil sands? Don’t have enough of a handle to ever make a guess. But take note: while production has been heading towards 3 million bbls per day thanks to the higher oil price the first 1 million bbls per day was developed when the inflation adjusted price of oil was $30 to $40 per bbl. And in the case of mature development projects a certain amount of capex has already been invested and are thus sunk costs that won’t have as significant a roll in the economic analysis. OTOH the economic analysis of the yet to be initiated projects will bare the full brunt of the total capex cost. But, those should be somewhat lower thanks to increased competition by the suppliers faced with a shrinking market.

  6. dave thompson on Sat, 21st Feb 2015 10:33 pm 

    May we live in interesting times. Yea hey DREDD blog good stuff keep er coming.

  7. Kenz300 on Sun, 22nd Feb 2015 11:45 am 

    Pope Francis’s edict on climate change will anger deniers and US churches | World news | The Guardian

  8. PrestonSturges on Sun, 22nd Feb 2015 3:19 pm 

    There have been several previous tar sand booms and busts.

  9. Bob Owens on Sun, 22nd Feb 2015 6:06 pm 

    If you take their best production costs of $51 and add a profit of $20 you need a per barrel cost of $71 for oilsands to be profitable. Anything less and you can’t get the financing you need and pay shareholders. So, unless there is a big rebound in oil costs (not likely) these companies are going under. Solar is looking better every day.

  10. rockman on Sun, 22nd Feb 2015 6:26 pm 

    Bob – “…you need a per barrel cost of $71 for oil sands to be profitable.” The how would you explain the fact that the first million bopd production was reached with oil prices between $30 and $40 per bbl? And a clarification: is the $71/bbl required to start a new recovery project or maintain production in which tens of $millions have already been invested? And lastly: does it cost the same to produce a profit from the sweetest spots in the oil sand trend as well as the poorer deposits?

    Generalizations are easy to offer. But the details tend to screw up the conversation. LOL.

  11. Northwest Resident on Sun, 22nd Feb 2015 8:14 pm 

    “The oil glut is gong to drive some energy companies into bankruptcy.”

    It is much more correct to say that falling demand is going to drive some energy companies into bankruptcy.

    The glutster likes to pretend that a sudden fantastic glut of oil resulted in oil prices plunging. But the glutster is wrong, as usual, regardless of how many times he repeats “oil glut”, the facts speak for themselves.

    Oil’s “Surprise” Collapse: It’s the Demand STUPID

  12. Kenz300 on Mon, 23rd Feb 2015 12:53 pm 

    The world is waking up to the damage caused by fossil fuels on the environment and are looking to transition to safer, cleaner and cheaper forms of energy production………. demand growth has slowed……. population growth has not……..

  13. Speculawyer on Mon, 23rd Feb 2015 3:40 pm 

    They’ll just mothball the operation for a while. It will be back.

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