Petro-Canada Announces New Oil Sands Breakeven: $50 a Barrel

The irony of construction cost rising to justify commodity price to justify equity investment is demonstrated in buy-recommended Petro-Canada (PCZ)’s announcement of a price tag of US$18 billion on its Fort Hills oil sands project. For satisfactory profit, it now takes an oil price above US$50 a barrel, up from perhaps $25 a barrel five years ago, judging from a presentation on June 28 by Chief Executive Ron Brenneman and his Petro-Canada colleagues.

Specifically, Fort Hills apparently would earn an 8.2% annual return on owner’s investment at a light, sweet crude oil price of US$53 a barrel, after we adjust to take account of today’s value of the Canadian dollar. In contrast, the current quote of US$72 a barrel for the next six years implies either a higher return on investment or a higher present value of a third more than full capital cost of C$134,000 a daily barrel.

Taking account of the risk in achieving construction success, we suggest a half weighting in PCZ stock in the illustrative McDep Energy Portfolio. Noting that the stock market prices a fully completed plant, Syncrude, at a low C$122,000 a daily barrel, we suggest a double weighting in the stock of buy-recommended Canadian Oil Sands Trust (COSWF), a pure play on Syncrude.

PCZ vs. COSWF 6-mo chart:

Comments

[Ernie Montague]

As I expected, oilsands are starting to turn into a more expensive proposition than they appeared. The enormous environmental problems have yet to be dealt with. Ever increasing tailing ponds and huge amounts of fresh water needed to process oil sands are not going to make this sythetic crude a cheap product.

[Saildog]

This is nonsense. The price is dependent to a very great degree on the price of natural gas. Crude oil itself is another major input. Supply capacity for NG and oil is getting tighter every day - as the prices go up so will the break even for Tar sands. It's like the end of the rainbow - always just ahead; you can never reach it. Once the true scarcity of North American natural gas is priced in the tar sands are dead.

The operators know this because they talk about nukes to deliver the heat needed. If nukes are ever needed the tar sands operations will die.

[Canuck Investor]

Fort Hills may make money but the main problem is the production technique. Oilsands mining projects have poor economics compared to SAGD. It may seem counterintuitive but deeper pay formations are more attractive (if they have certain characteristics). And if you look at the projects with the highest cost overruns you'll find that they're all mining projects. Stay away from oilsand mining operations.