Canadian Oil Sands Not "High Cost" or "Economically Unviable" to Produce: REPORT

Myth - Canadian oil sands are too high cost to maintain production in future v2 - Copy

How many times have you heard the claim that oil sands production is "too expensive" for the sector’s longevity in a world looking to reduce its reliance on fossil fuels?

Because of its "costly" nature, anti-Canadian energy activists suggest the oil sands won’t be economically viable when oil demand begins to decrease, whenever that may be (HINT: it won’t be 2023, or anytime soon either).

A new report by the C.D. Howe Institute puts those false claims to rest – for good. Commentary No. 635 Last Barrel Standing? Confronting the Myth of “High-Cost” Canadian Oil Sands Production has busted the wrongful characterization of a sector that accounts for roughly two-thirds of Canada’s oil output.

According to the report, the oil sands are not “too expensive” as opponents would have us believe, and oil sands companies will continue to produce as long as the prevailing price of Western Canadian Select (WCS) crude oil blend remains above CAD $40 per barrel.

For comparison, non-oil sands production in other countries such as the U.S. will likely require prices higher than CAD $40 per barrel for long-term viability.

global crude oil scenarios 2020-2050 - CD Howe Institute

Global Oil Demand Projections & Scenarios - C.D. Howe Institute

The cost structure of oil sands projects naturally makes them a long-term contender for meeting consumer demand. While requiring substantial up-front capital investments, these projects are able to maintain (or even increase) annual production over several years or decades with relatively small marginal costs per barrel.

This contrasts starkly with non-oil sands producers where individual well productivity drops much faster over time, requiring larger new annual capital investments to maintain production.

The potential durability of oil sands production in a low-price environment is something to be celebrated, given the incredible wealth and prosperity our energy exports create for all Canadians.

Report Highlights

canadian conventional oil production operations decline - CD Howe Institute

WCSB Non-Oil Sands Production Over Time - C.D. Howe Institute

longevity of oil sands in-situ operations - CD Howe Institute

Oil Sands In-Situ Production Over Time - C.D. Howe Institutelongevity of oil sands operations - CD Howe Institute

Oil Sands Mining Production Over Time - C.D. Howe Institute

> Several media articles claim oil sands are “too expensive,” or are “some of the world’s most expensive crude” and “more expensive to produce than other jurisdictions.” These claims are false.

> Most oil sands bitumen production is exported directly or after initial refinement. Hence, opponents suggest that as the world begins to decarbonize, moving away from oil as an energy source will make Canadian production uncompetitive, and lead to a significant decline. This is also false.

> The domestic hub price (Western Canadian Select) needed to support continued oil sands production is in many cases well below CAD $40 per barrel. Comparatively, North American producers likely require prices above CAD $40 for long-term production stability.

> Canadian oil sands are somewhat of a unique resource globally. While there are similar bitumen deposits in other nations like Venezuela, Russia and the USA, Canada’s are the largest and most developed.

> The cost structures for oil sands are substantially different from conventional production. Specifically, oil sands projects require significant up-front capital investments (typically into a mine or in-situ facility) compared to non-oil sands production, which typically only needs investment into drilling a well.

> Global oil price projections over the long term vary significantly depending on the source (Figure 1). The share of production Canada’s oil sands would satisfy depends on regionally specific assumptions and the prevailing price environment, which is likely to favour legacy oil sands projects due to low costs.

> Well production decline rates of conventional crude oil wells over the long term are significantly higher than their oil sands mining and in-situ counterparts, as shown in Figures 2, 3, and 4 shown above. In fact, some oil sands projects see production increases over time, rather than decreases.

> In 2020, approximately 3.75 million barrels per day (bpd) – nearly 95% of oil sands production – were produced at a marginal cost below $40 per barrel, even when sustaining capital costs are included.

> Marginal oil sands production costs fell between 2016 and 2020, an observation supported by recent industry research suggesting that both capital and operating costs have been falling in the industry.

Please note: other important (and more complex) points related to carbon taxes, the emissions cap and OPEC’s global market power are not shared. We highly recommend reading the report if you’re interested in how these factor into the longevity of oil sands production on global markets!

Global Oil Demand is Growing

IEA world oil supply demand 1971-2020 edited cover

World Oil Supply & Demand 1971-2020 - International Energy Agency

The International Energy Agency’s most recent outlook projects global oil demand to reach an all-time high of 104 million barrels per day in 2023, shattering predictions by anti-oil and gas groups that the last few years would bring about ‘peak’ global fossil fuel consumption.

Activists have been trying to shut down Canadian pipelines for years, citing a “soon-to-be” reduction in global demand as a sign that we no longer need oil. But time and time again when there is a dip in oil global consumption, it comes roaring back stronger than ever - as it has in 2022, 2008 and other years before that (see chart above).

For example, since the Keystone XL project was introduced, global oil demand has grown by more than 10 million bpd. The now-defunct pipeline would have transported hundreds of thousands of additional barrels to U.S. Midwest and Gulf Coast refineries daily while reducing America’s dependence on less reliable and responsible foreign suppliers.

A pattern emerges.

The claim of “high cost” oil sands production is just one of many tools anti-resource development activists use to stifle responsible Canadian energy from reaching global markets. Such claims of “economic unviability” in a future where fossil fuel demand begins to drop (which we have yet to see) are seemingly more than ever part of a broader pattern by activists to mislead the public altogether.

This isn’t balanced, honest or pragmatic. Canadians deserve better.

Canadian Oil Sands Here to Stay

IEA predicts global oil demand to rise to new record high of 104 million barrels per day in 2023 - Copy

According to C.D. Howe Institute’s report, legacy oil sands production is highly resilient in the face of potential global demand reductions.

Most oil sands operators will continue to produce as long as the prevailing WCS price is above the CAD $25-$30 range, while others can produce at prices as low as $15-$20.

In contrast, non-oil sands producers will for the most part stop investing in new production when the West Texas Intermediate (WTI) oil prices reach below USD $45 – roughly equivalent to a WCS price of $40.

The low-cost nature of oil sands projects clearly makes them ideal as a long-term energy source for decades to come. With heavy oil found in few other responsible producer countries worldwide, it’s clear that the oil sands are the best choice for future global supply.

Who would you choose to source your oil from? Stable, responsible and democratic producers like Canada, or non-transparent autocratic nations like Venezuela with little to no protections for human rights and the environment?

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