CERI still expects much oil sands capital influx

A recent report from Canadian Energy Research Institute still sees substantial influx of capital into Alberta oil sands development even with the world's current economic downturn.

This article was corrected on Oct. 31.

By OGJ editors
HOUSTON, Oct. 30 -- A recent report from Canadian Energy Research Institute (CERI) still sees substantial influx of capital into Alberta oil sands development even with the world's current economic downturn.

Its reference case lowers capital expenditures during the next 20 years to $317 billion (Can.) from the $472 billion (Can.) if all projects go ahead as currently planned. It adds that the lower capital outlay is still a "strong stimulus for job creation and economic growth in Alberta and the rest of Canada."

In its reference case, oil sand's bitumen production increases to 5 million b/d in 2030 from the 1.5 million b/d in 2008. Synthetic crude oil (SCO) production increases to 3.4 million b/d by 2030, or 76% of the marketable 4.5 million b/d of bitumen produced.

CERI's reference case doubles project delays and curtails production by 20% from its unstrained case. Three other assumptions in the base analysis are $7.01 (Can.)/GJ natural gas price, 2.2% inflation rate, and constant 95¢ (US)/$1 (Can.) exchange rate.

CERI says capital costs have increased on a dollar per barrel basis to greater than $35,000 (Can.) for cyclic steam, greater than $28,000 (Can.) for steam-assisted gravity drainage, greater than $90,000 (Can.) for mining, greater than $58,000 (Can.) for upgrading, and greater than $140,000 for an integrated mining and upgrading projects.

The CSS and SAGD capital cost estimates assume 30,000 b/d capacity projects, while the mining, upgrading, and integrated projects assume 100,000 b/d capacity projects. Cost estimates for the CSS, SAGD, and mining project are on a bitumen barrel basis, while for the upgrading and integrated projects, they are on a SCO barrel basis.

CERI says that, depending on the method of extraction and level of integration, the projects need an average WTI price at Cushing over the project life of $83-110 (Can.)/bbl to obtain a 10% rate of return.

It notes that in past years the cost of producing a barrel from mining was only marginally higher than for it situ projects, but now the cost is almost triple.

CERI's report reflects the new royalty rates that start in 2009. The new royalty rate is tied to global oil prices. For CERI's royalty calculations, it assumed a WTI oil price based on a 12:1 ratio with the natural gas price. Its assumed $8 (US)/MMbtu NYMEX price translates into $101 (Can.) WTI. This results in a 6.66% royalty rate prior to project payout and a 35.62% royalty rate after payout.

Its calculated royalties as a percent of plant gate supply costs are 18% for mining, 12% for in situ, and 12% for an integrated projects.

Total supply costs for bitumen have increased by 25-50% since its 2007 analysis, but CERI now believes the economic slowdown and restricted available capital will slow the increases to a more reasonable rate and may slightly reduce them in 2009.

CERI notes, "As the global price of oil tests new 52-week lows on a regular basis it is important to remember that these projects will last 30 plus years and investment decisions will be based less upon current economic times as they will be upon long-term expectations about the future."

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