Can oil sands survive sub $100 crude prices?

August 15, 2014 08:00 AM

 ConocoPhillips and Royal Dutch Shell Plc are among global oil companies needing crude prices as high as $150 a barrel to turn a profit from Canada’s oil sands, the costliest petroleum projects in the world, according to a study.

The next most-expensive crude projects are in the deep waters off the coasts of Africa and Brazil, with each venture needing prices between $115 and $127 a barrel, said Carbon Tracker Initiative, a London-based think tank and environmental advocacy group, in a report today.

As the U.S. shale drilling boom floods the world’s biggest crude market with supply, explorers are at greater risk of a price collapse that would turn some investments into money losers. Energy explorers are willing to invest in high-cost oil- sands developments because once they are up and running, they produce crude for decades longer than other ventures such as deepwater wells, said David McColl, an analyst at Morningstar Investment Services in Chicago.

“Where else can you get 10 to 30 years of predictable cash flow?” said McColl, who estimated new oil sands projects require $60 to $100 crude to make sense. “The returns may not be stellar compared to some other projects but they are steady.”

Redeploying Capital

After four straight years of gains, Brent crude, the benchmark price for most of the world’s oil, declined 0.3 percent last year to an annual average of $108.70. Brent for September delivery slumped as low as $102.10, a 13-month low, on the London-based ICE Futures Europe exchange yesterday.

“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.”

Carbon Tracker said it derived its projects list and cost estimates from a database compiled by Rystad Energy AS, an Oslo- based oil-industry consultancy.

In May, Carbon Tracker released a report that said the oil industry was at risk of wasting $1.1 trillion of investors’ cash on expensive developments in the Arctic, oil sands and deep oceans. That figure represents the amount explorers may spend on oilfields that need crude prices of $95 a barrel or more, the group said three months ago.

Shareholder Pressure

Oil companies face growing pressure from shareholders to rein in costs after two decades of bigger spending have failed to boost production or profitability, said Steven Rees, who helps oversee $992 billion as global head of equity strategy at JPMorgan Chase Bank.

The projects most at-risk from lower prices are ConocoPhillips’s Foster Creek development and Shell’s Carmon Creek, oil-sands developments in Alberta that respectively need $159 and $157 a barrel oil to be profitable, Carbon Tracker said.

A joint ConocoPhillips and Total oil-sands project called Surmont requires $156 a barrel, while Exxon Mobil Corp.’s Aspen and Kearl developments in the same part of Canada need $147 and $134 crude, respectively, to make economic sense, the study found.

Shell, Europe’s biggest company by market value, relies on a per-barrel price range of $70 to $110 “for the purposes of longer-term project planning,” Sarah Bradley, a spokeswoman for The Hague-based corporation, said in a telephone interview. She didn’t directly address the study’s findings with regard to the oil sands.

Spokesmen for ConocoPhillips and Exxon said they couldn’t immediately comment on the study’s findings. A request for comment from Total was not responded to immediately.

Other high-cost regions highlighted in the report included the Partitioned Nuetral Zone shared by Saudi Arabia and Kuwait, the Arctic and the Gulf of Mexico.

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