Whither Canada's Tar Sands?

One of the unfortunate consequences of plunging crude oil prices is that it throws the recent strategic planning for energy exploration and the development of alternative energy sources on its head.

Really. Why would Brazil attempt to develop their newly discovered (and very costly) giant offshore oil find if they can't pump the stuff out at a profit? They've got plenty of sugar cane to run their cars and the rest of the world isn't clamoring for any more black goo at the moment.

They're about to cut production at OPEC.

While $150 crude oil may have seemed ridiculous over the summer, prices at under $70 seem equally out-of-step in the fall, especially if you're working on a project that requires a price of $80 or $90 to break even.

Last week, former CIA director James Woolsey quipped:

Every decade or 15 years or so, the Saudis drop the price of oil to where the economic impact wipes out most of the projects in the world that could lead to an alternative for oil. Then, after the projects get canceled, the Saudis let the oil price drift back up.

An intriguing idea to be sure, which is not to say that the Saudis had anything to do with the recent 50 percent haircut for their most important export.

Well, actually, "life-blood" would be a better characterization than "important export".

North of here, our Canadian neighbors are beginning to ask some hard questions now that the new reality of lower oil prices is starting to settle in.

In this report from today's Globe & Mail, they're wondering if digging all that tar out of the ground makes as much sense today as it did back in June.

Other than the potential for a severe economic recession, the development of the oil sands is likely the most important economic and political issue for Canada for the coming decade. Based on present expectations, the oil sands will host at least $170-billion of investments during this period. Canada is already the main oil supplier to the U.S., and proven oil resources in Alberta are second only to Saudi Arabia.

The challenges remain daunting. The costs of mining and upgrading the resource have skyrocketed, and the break-even point for new projects is close to $85 (WTI) a barrel, an increase of $20 from just a year ago. Volatile oil prices, coupled with environmental and regulatory risks, and the massive investments required for long-term returns, have led many existing and potential players to adopt a more “prudent,” that is, conservative, approach. Over the last few months, the stock market correction has been particularly devastating for the oil sand players.

Russia, Venezuela, Iran...

The impact of cheap oil is starting to be felt in ways never dreamed of just a few months ago.

Come to think of it, despite all their protestations a while back, the Saudis really did step up and boost production when the time was right..

Maybe Woolsey was right.

Comments

[k45]

I remember when the tar sands required $40/barrel to break even. What happened to double that? Excessive growth?

Exxon has been criticized for being slow to increase spending for exploration. They are a wise company, they read the bubble.

But I think you also touched on why it is important for the U.S. to work on "energy independece". Each time we do so (remember the shale oil development in the 70's?), the global price of oil comes down to kill it off. Coincidence, or cause and effect?

2008 Oct 22 08:11 AM

[Lymon]

I know we(USA) needs to give tax breaks to "big oil" cos. for the use of R&D. I mean, check the record that is what Russia has done to up production and it has worked. We will never come to the point where we will not need oil. We may not use it for gasoline as other forms of fuel become available, but petroleum distilates are used in production of just about everything. So to become oil independent we need to lift the ban and drill anywhere there is oil, onshore or offshore. We have foreign countries drilling off our(USA) coasts now, so why shouldn't we help ourselves by reaping in the off shore "black gold"??I could go on and on but McCain has it right give tax breaks to the oil companies for R&D and start drilling. Politics make the tax break sound like it is giving money to the already rich CEO's,CFO's, etc. of these companies. When in reality it will help us(USA) become more energy independent quicker.

2008 Oct 22 08:57 AM

[raising4daughters]

Woolsey is right, and OPEC's actions have been smart enough to prevent us from seriously looking at alternative fuels.

We've got to find a way to factor in the cost of transferring money to enemies instead of friends. I hate the thought of tax oil and gasoline to a greater extent, but the West must wean itself off oil from terrorist haven, Christian-hating enemies like Saudi Arabia and pretty much every nation in SW Asia.

2008 Oct 22 09:00 AM

[john s. gordon]

if you want to reduce oil import expense, tax per gallon @ the pump works. they do it in europe where in-the-ground oil resources are minimal. in italy if you insist on driving a car w/engine larger than 2 litres you get to pay a whopping annual excise tax for the privilege,
> jack

2008 Oct 22 09:11 AM

[Ferdinand E. Banks]

James Woolsey knows a great deal about energy, and not just oil, but his vision of how Saudi Arabia adjusts the oil price is completely wrong. As for break-even prices, Big Oil was perfectly comfortable with the prospect of $20-22/b a few years ago. I think that they can live with the present and likely future price.

2008 Oct 22 09:48 AM

[OilyGasMiner]

Let's not forget alternative energy.

Wrong board? NO.

Alternative, believe it or not is quite dependent on oil. How?

FUNDING. Alas. the Light. The majority of tax breaks and grants given to A-Energy companies are from the carbon taxes enforced on large oil producers.. eg. Exxon.

If oil companies are producing less... guess what? profits will be less... and... you GOT IT! the gov revenue from carbon taxes will be less, resulting in less funds and breaks given to alternative energy players.

Ironic isn't it?

2008 Oct 22 10:04 AM

[pockyclips 2020]

Sadly, energy production is one of the most intensive uses of energy, and the return ratio gets worse every year. We simply have to get off the non renewable merry go round. Any project started in this century probably has no profit margin @ $70/barrel. ANWR and offshore drilling are just too
big a capital risk for returns in the next 3 -5 years.

2008 Oct 22 10:41 AM

[k45]

Alternate energy is good, as long as it is done intelligently and not like the ethanol boondoggle/scam. There is too little quality with alternative energy and too much wasted time and money.

2008 Oct 22 11:53 AM

[Steven Ward]

Conventional oil drilling is still the lowest eco footprint of all forms of production. Unconventional drilling and production wants the tax credits to lower the costs under the reasoning of "energy independence". But with the unconventional production comes a very large eco footprint.
If Obama is elected it will be interesting to see what he does on the energy independence issue with lower oil prices, rising un-employment and carbon credits.
Maybe, he'll just continue to "study" offshore drilling for 4 years.

2008 Oct 22 11:56 AM

[redbaron]

PorkyClips: Not only is energy production, energy intensive, alternative energy can also be energy intensive.

Ethanol projects were canceled here in the midwest, in the last year, due to not being able to contract for enough natural gas, and those projects were in the middle of a corn field, right on the Mississippi River, where corn was readily available, and transportation in the form or barge and rails, right on-site.

It takes huge amounts of energy, mostly in the form of natural gas to distill off ethanol.

2008 Oct 22 12:01 PM

[john s. gordon]

redb - corn is fertilizer-intensive, & natgas is used to make fertilizer.

you don't have to distill with gas-fired stills, ADM does it with a combination of coal & chopped-up waste tires in circulating fluidized-bed boilers. you can make electricity with topping turbines & use the same steam twice.
> jack

2008 Oct 22 01:48 PM

[Erich J Knight]

Below is a blog post on the in situ development of Tar sand, what do you think of it??

"Petrobank commences THAI/CAPRI Pilot

I share this recent release from Petrobank who is pioneering the THAI protocol for producing the tarsands. They have successfully implemented THAI and are now testing CAPRI which is a catalytic sleeve in the production well. They are also installing a slotted liner system
which should eliminate the sand inflow problem.

Remember this pilot system is only two years old. They are now also ramping up the air input in order to maximize production. Remember that in the early going, the burn front would be small preventing full air flow.
Now with plenty of oil removed it should be easy to expand air flow. It is projected that each well will achieve production rates of around 1000 barrels per day and sustain this for at least three years if not a great deal longer. No one is that courageous yet.

Read my post of a year ago to get a quick description:

globalwarming-arclein....

I cannot over exaggerate how important THAI technology
is. Without CAPRI a THAI well is converting 8 degrees API oil to 12 degrees API while also producing some lights. It is doing this without mining the tarsand or putting any fuel into the formation. The environmental footprint is little different that that of a conventional oil well with perhaps a little more CO2 allowed to escape that is surplus to what is dissolved into the formation itself which is beneficial in releasing the oil from the sand.

With CAPRI, it seems possible to bring the gravity up to perhaps 17 degrees API and that will make it directly shippable into the pipelines, or so close as to be easily upgraded."

2008 Oct 22 02:00 PM

[searcher]

The reason the economic 'break even' point for tar sands as well as shale oil etc. is a moving target is the very large number of 'moving parts' in these enterprises. Just think of the very large increases in projected costs for any large project even in tranquil times. These projects aren't going to be attractive unless we are in extremis and susceptible to what may well prove to be spurious cost 'caps'.

2008 Oct 22 03:03 PM

[xander]

the walmart I shop at sells led light bulbs that use 1.5 watts and produce as many lumens as a 40 watt incandescent bulb. this product is a real energy use killer. i paid 5.67 dollars per long life bulb.most walmarts i have checked don't carry it. if interested harass the manager of your local store until she gets it for you.

2008 Oct 23 02:23 AM

[maximax]

regarding Woolsey's allegation - there may be some truth in it historically, but i find it rather cynical for an American to claim that KSA wanted the price to crash. They only increased output to late July levels very reluctantly, after heavy international political pressure and a Bush visit.

2008 Oct 23 04:25 AM

[Steven Ward]

The THAI CAPRI system if it works ranks right up there with nuclear fusion in terms of energy production and energy independence.
We should all hope it works and buy some Petrobank at these prices.

2008 Oct 24 09:27 AM

[NOWHEREMAN]

I would prefer a system which uses coal rather than tar. WE have more Coal. The first commercial plant has received funding and is already under construction, while you wait to see if it "works" for all of this other technology.

I'll share after I'm done buying. This meltdown doesn't discriminate and the shares are thinly traded.

2008 Oct 25 02:42 AM

[Erich J Knight]

But which one?;

Symbol Name Last Trade Type Industry/Category Exchange
PBE.BE PETROBANK ENERGY 12.40 Stock BER
PBE.DE PETROBANK ENERGY 15.00 Stock GER
PBE.F PETROBANK ENERGY 12.33 Stock FRA
PBE.MU PETROBANK ENERGY 12.72 Stock MUN
PBE.SG PETROBANK ENERGY 12.33 Stock STU
PBG.OL PETROBANK ENERGY 237.50 Stock OSL
PBG.TO PETROBANK ENERGY & COM NPV 19.97 Stock TOR
PBEGF.PK PETROBANK ENERGY & R 15.58 Stock PNK

2008 Oct 26 11:50 PM

[Mad Hedge Fund Trader]

#$%^& Anyone who has any illusions about the Canadian tar sands business should take a look at the March issue of National Geographic, not normally a prime source of financial and economic news for me. I’m not normally a big time environmentalist, but just looking at the glossy, eye opening pictures tells you that this is this an ecodisaster of Biblical proportions. A $50 billion investment by several firms over the last decade is now producing 750,000 barrels/day, and another $100 billion was headed north before prices crashed last year. You have to cut down a whole forest, remove two tons of peat, then another two tons of sand, and burn 100 barrels of oil equivalent to heat rivers of water to steam, just to produce a single barrel of oil. This gives you the world’s highest production cost, thought to be $80-$100/barrel. There are now 50 square miles of sludge ponds in Northern Alberta leaching a witch’s brew of poisons into the water supply, which has caused the local cancer rate to explode tenfold. We’re not just talking about a few sick ducks and fish here. Canada is the largest foreign supplier of oil to the US, accounting for 19% of the total, and half of that is coming from tar sands.

2009 Feb 27 02:39 PM