WATCHING THE WORLD: Investing in oil sands

July 23, 2007
Depending on how you look at it, an investment in Canada’s oil sands could bring you untold wealth or-depending on certain environmentalists-not.

Depending on how you look at it, an investment in Canada’s oil sands could bring you untold wealth or-depending on certain environmentalists-not.

First, the wealth. According to at least one investment strategist we know, oil sands may represent an extremely worthwhile investment, with numerous factors pointing to long-term positive performance in the sector.

These factors, one analyst tells us, include technological progress, a safe geopolitical situation, high levels of investment, and rising profits.

Due to technological progress, we are told, production costs of about $20/bbl and an international oil price of more than $40/bbl means that the extraction of oil from oil sands is now highly profitable.

Rising profits

Our financial analyst said further advances in extraction technology could reduce operational costs to $10/bbl, meaning even higher profit margins.

As for a safe geopolitical situation, there are probably fewer countries on earth that have a safer one than Canada. Care to try your luck in Venezuela, which also has oil sand deposits? Keep in mind Hugo Chavez before you go.

Also, in Canada there is already a high level of investment in oil sands development. In fact, we are told that Lehman Bros. investment bank estimates that the Canadian oil industry will invest about $85-90 billion (Can.) in oil sands projects over the coming years.

As a result, our financial adviser said, oil sands are not just a prospect for the future. “The Canadian oil sands industry is largely well-established and already makes substantial profits,” she said. Still, one might have to consider other forces that could upset such an investment-and one does not have to factor in the political vagaries of an Iran, Russia, or Ecuador. Nope. On this one, the upset factor lies much closer to home.

Opposed by environmentalists

According to recent reports, leading US environmentalists have taken up space in Calgary due to the rising economic importance of Canadian oil sands as well as growing concern about global warming. In fact, over the past 6 months, US groups such as the Natural Resources Defense Council, the Sierra Club, and Environmental Defense have stepped up their participation in Canada’s public meetings and on regulatory matters.

According to Robert Page, senior adviser to Canadian power producer Transalta Corp., the presence of such groups, which are financially better able than their Canadian counterparts, means the environmental campaign has more power behind it.

The environmentalist campaign, coming even as oil sands production continues to grow, says the process is energy intensive and that it results in huge quantities of carbon dioxide emissions, linked by scientists to global warming.

As a result of their concerns, the National Resources Defense Council has sharpened its focus-and probably its knives, too-on the development of Canada’s oil sands.

Needless to say, that could have an adverse effect on investment portfolios that include oil sands developments. See your financial advisor-pronto.