Canadian oil beats U.S. on costs, bank study says

Date of Article: February 24, 2014

Source: Calgary Herald

Author: Dan Healing

Link: www.calgaryherald.com/business/Canadian+beats+costs+bank+study+says/9545692/story.html

CALGARY — Western Canadian oil plays, including the oilsands, can compete on costs with the best light tight shale oil plays in the United States, a new study says.

An examination of 50 plays in Canada and the U.S. shows that, on average, Canadian oil plays can generate decent returns at a cheaper benchmark West Texas Intermediate oil price than those in the U.S., analyst Patricia Mohr says in the latest Scotiabank commodity report,

“In Canada, an average WTI oil price of $63 to $65 US per barrel is required to yield a nine per cent after-tax return on full-cycle costs ... compared with close to $72 US in the United States (based on costs in the fall of 2013),” she wrote.

Mohr said Canadian producers pay less in government royalties but advances in technology have also helped with competitiveness, especially in the oilsands.

Scotiabank shows that an average steam-assisted gravity drainage oilsands production in Alberta breaks even at about $63.50 US per barrel. The thermal technology accounts for 1.08 million barrels per day or 46 per cent of Alberta’s oilsands output and is likely to represent three-quarters of the 1.2 million bpd growth projected through 2020.

Existing oilsands mining and upgrading operations in the Fort McMurray region have full cycle break-even costs between $60 and $65 US on current output of 900,000 bpd, Scotiabank notes, adding greenfield projects would be closer to $100 per barrel.

Meanwhile, Permian Basin oil production in Texas requires an average price of $81 US per barrel to break even and U.S. Bakken plays such as those in North Dakota need about $69. Texas Eagle Ford production comes in at $63.57 on the chart.

Mohr’s report adds that oilsands projects are long life and low decline, in contrast with short life and rapid decline rates of shale projects now being developed thanks to implementation of horizontal drilling and hydraulic fracturing technology.

In an interview, she said that the lower value of the Canadian dollar has resulted in even lower costs in Canada since last fall.

Jackie Forrest, senior director at IHS CERA, said her energy consultancy’s numbers are different, likely because of different assumptions, but the overall theme is the same — Canadian oil competes well with U.S. oil.

“I would agree with Scotiabank there are some tight oil plays that overlap with some oilsands developments but if you took the group as an average ... we would say that oilsands SAGD is slightly higher,” she said.

“With our outlook for oil price, we see both developments going forward in North America, because they are both within what we see as economic.”

An IHS CERA study released in October showed that the average oilsands SAGD break even price was $80 US per barrel. Tight oil was ranked at $66 US per barrel.

“There’s a view that oilsands is the most expensive supply of oil out there and, if oil prices drop, oilsands will be the first thing that wouldn’t be developed, and that actually isn’t the case,” Forrest said.

The IHS report showed the thermal oilsands break even point as lower than offshore Russian production and competitive with North Sea, West African and tight oil.