Oslo-based research firm Rystad Energy has poured cold water on claims by an industry watchdog that development of Alberta oil sands projects would require a high oil price to make them profitable due to prohibitively high costs and that they should therefore be cancelled by majors.
A study released last week by the London-based think tank Carbon Tracker Initiative warned that a recent fall in oil prices is undermining the commercial viability of such schemes as oil companies cut investments to focus on more profitable projects amid investor pressure to boost returns.
Projects most at risk are Cenovus' and ConocoPhillips’ $1.9 billion Foster Creek development and Shell’s $3.4 billion Carmon Creek scheme that would require an oil price of $159 and $157 per barrel, respectively, to make them viable and are among “prime candidates for cancellation”, according to the report.
Next on the list are the Surmont oil sands project being jointly developed by ConocoPhillips and Total, requiring an oil price of $156, and ExxonMobil’s Aspen and Kearl developments, which would need $147 and $134 to break even, respectively, it stated.
ConocoPhillips’ Christina Lake scheme is said to require a break-even oil price of $128 per barrel.
“In order to sustain shareholder returns, companies should focus on low-cost projects, deferring or cancelling projects with high break-even costs,” the report’s authors wrote. “Capital should be redeployed to share buybacks or increased dividends.”
Majors are targeting collective capital spending of $548 billion over the next decade on projects that will require an oil price of at least $95 per barrel, accounting for 34% of total capex on all their projects, according to Carbon Tracker.
Of this total figure, around $357 billion is earmarked for projects that have yet to be developed.
Carbon Tracker said it derived its project list and cost estimates from a database compiled by Rystad.
However, the Oslo firm on Monday released a statement in which it claimed its own source data “tells a somewhat different story” and that extraction of heavy oil from the tar-like sands is set to remain a profitable business for the majors.
Out of the 10 planned development stages for Foster Creek, only the final unsanctioned phase shows a high break-even price in initial analyses, according to Rystad.
It stated that such projects typically require netbacks of at least $40 per barrel – after royalties, operational costs and price spreads - to make them profitable.
While it stated this level of return has not been achieved on all projects, Rystad believes flagship schemes using steam-assisted gravity drainage techiques such as Foster Creek, Surmont and Christina Lake “are clearly candidates for profitable expansion when scrutinising our databases with unbiased eyes”.
Rystad analyst Perv Magnus Nysveen said: “Our detailed data also shows oil majors’ resource base amounts to 40 times their annual production and 85% of those resources will provide a return on capital of at least 10%.
“So we believe these industry leaders can make sustainable profits for decades to come, especially on their SAGD brownfield projects.”
A spokesman for ConocoPhillips was quoted as saying by Business News Network that Carbon Tracker’s project cost estimates were “twice as high as they should be” based on the US company’s own analysis.
“We don’t believe the estimates CTI are quoting are accurate or realistic. We believe there is great value to having oil sands in our portfolio,” he said.
ConocoPhillips intends to spend $800 million a year on oil sands projects over the next three years that will generate more than $1 billion in annual cash flow starting in 2017, according to the spokesman.
Anglo-Dutch Shell meanwhile reportedly operates on the basis of a per-barrel price range of $70 to $110 for its longer-term project planning.
The average Brent crude benchmark price dipped last year to $108.70 and oil for September delivery has slumped to a 13-month low of $102.
Oil sands projects are seen by analysts as providing stable cash flow over a long period of as much as 30 years but generally require an oil price of between $60 and $100 per barrel to make sense.