By OGJ editors
HOUSTON, Mar. 7 -- Canadian oil sands projects recently have seen a major increase in capital costs per peak flowing barrel, which is putting pressure on returns on investment in an area where project economics are already considered relatively marginal, said Wood Mackenzie in its report, "The Cost of Playing in the Oil Sands."
The report shows that since 2005 overall costs per peak flowing barrel have increased by about 55%.
Additionally, in 2006, many of the main oil sands companies announced either changes to their original development plans or cost increases, resulting in an average rise of 32% in outlays per peak flowing barrel over the year for integrated mining projects. For in situ developments, the average rise in cost was 26%.
Conor Bint, WoodMac upstream research analyst, Canada and Alaska, said, "Entrance into the highly competitive oil sands market does not come cheap. Despite rocketing land prices, the cost of acquiring acreage is negligible compared to the investment required for a commercial development."
He said, "Marginal economics have always been a concern for companies operating in the oil sands," adding that breakeven prices are high and rates of return relatively low compared with conventional projects, "particularly for mining projects."
WoodMac estimates that mining projects have an average breakeven price of $28/bbl and an internal rate of return of just 16%. Rates of return are more favorable at the less capital intensive in-situ projects, averaging 22%.
WoodMac expects some $125 billion (Can.) to be spent in oil sands by 2015. This represents a 42% increase on its early 2006 forecast of $88 billion (Can.) for the same period. The significant cost increase is due largely to labor shortages and increased material costs, which have created a hyper-inflationary environment within the oil and gas industry in Alberta.
Oil sands projects are relatively labor-intensive, requiring as many as 5,000 workers to bring a project to peak production. "With the sheer number of oil sands projects, together with the future arctic pipelines and conventional oil and gas developments in Alberta, labor demands in Canada will be pushed to their limits," Bint said.
Cost increases are also linked to the immaturity of oil sands developments, according to the report, which points out that companies are learning best practices during development phases and still gaining experience in managing large scale projects.
Costs are set to continue increasing, the report concludes. And to sustain the current pace of development, Bint said, "Companies in the oil sands will have to control capital expenditures going forward to ensure that project breakeven prices do not exceed current levels in order to remain profitable." WoodMac suggests this may point to project management and contractor scheduling as key factors in oil sands success.
Undoubtedly, major oil and gas companies worldwide are attracted to the oil sands region of Canada because of the longevity of the projects and the scale of the resource base. WoodMac's report states that Canada's proved oil reserves, about 179 billion bbl, are second only to those of Saudi Arabia. Of this, around 97% or 174 billion bbl is attributed to oil sands.
Currently, output from oil sands stands at about 1 million b/d, accounting for roughly 35% of total Canadian production. However, based on projects that WoodMac considers commercial, this is forecast to increase to about 4 million b/d or 89% of total Canadian production in 2020.