Oil sands producers dig in as slump worsens
At current prices they're losing money, but with billions invested, they can’t afford to bail out.
JEFF MCINTOSH / THE CANADIAN PRESS
A fully loaded truck drives away from a mining shovel at the Shell Albian Sands oilsands mine near Fort McMurray, Alta., in this file photo.
Alberta’s oil sands are “on the edge” a report said Monday as crude prices slumped to a new six year low on worries about sharp deceleration in Chinese demand amid a massive glut in supply.
Oil prices tumbled more than 5 per cent after the U.S. Energy Administration said growth in global production of petroleum has outpaced consumption growth since August 2014.
Traders also worried a slowdown in the mainland Chinese economy may be worse than expected and could drastically slow oil consumption and aggravate the supply imbalance.
U.S. light crude closed down $2.21 or 5.5 per cent at $38.24 U.S. a barrel, the lowest since February 2009 and on top of declines last week that capped the futures contract’s longest weekly losing streak since 1986.
Oil and gas producers dropped to their lowest level in almost four years as Chinese stock markets suffered their biggest one-day drop since the financial crisis.
That cascaded into a huge sell-off in global equities and commodities, with the S&P/TSX index dropping 768 points or 5.7 per cent in early trading. Canada’s main index finished the session at 13,052.74 points — down 420.93 points from Friday’s close. The dollar fell 0.54 of a U.S. cent to $75.40 cents U.S. — its lowest close since August 2004.
The price of Texas benchmark light crude dropped on the inventory report, helping push Canada’s benchmark heavy oil to below $24.
The International Energy Agency in its 2015 world energy outlook said lower prices will boost customer demand, but market conditions and the pressure to reduce fossil fuel consumption in the fight against global warming may signal a new sort of rebalancing in a lower oil price future.
A spokeswoman for oil giant Syncrude, however, said the industry has little choice but to ride out the storm.
“Syncrude has been operating for 50 years so we’ve seen several price cycles,” said Siren Fisekci, investor and corporate relations vice president for Syncrude’s major shareholder Canada Oil Sands Ltd.
“The view is that the market will rebalance in time.” She added that the current oil price cycle is not fundamentally different from any other and noted that the costs of shuttering production would be prohibitive.
The price for light crude and synthetic bitumen would have to stay low for a very long time before the industry moves beyond cost containment to disinvestment and a roll back of current output, Fisekci said.
Canadian oil sands producers have little choice but to keep producing, Peter Argiris, an analyst at Wood Mackenzie in Calgary told CTV News.
“The problem is these companies just can’t stop producing. They still need to produce, they need to pay their bills, and they need to ensure their bond covenants are not breached.”
A report from TD Securities says only two mining and upgrading projects are producing synthetic crude for less than its market price of about $36 per barrel.
Analyst Menno Hulshof said more than three-quarters of Canada’s daily output of 2.2 million barrels of crude from the oil sands is being produced at a loss at current prices.
He said thermal oil in which steam is pumped underground to heat reservoirs so bitumen can flow to the surface is losing money on every barrel produced. Hulshof said only around 450,000 barrels per day of oil sands production is in the black.
A report by JBC Energy, meanwhile, said oil sands viability is “on the edge” at current prices, with producers struggling to cover costs.
Oil price drivers
U.S. energy policy: Domestic energy production met about 89 per cent of U.S. energy demand in March. That’s up from 84 per cent in 2013 and reflects an Obama policy that has focused on energy independence. As a result, oil exploration has increased with a major focus on shale gas production
Iran: The lifting of sanctions imposed over the country’s nuclear program will eventually add about a million barrels of oil a day — that will begin to lower oil prices next year, according to the World Bank.
OPEC: The Organization of the Petroleum Exporting Countries would be unable to stabilize the market on its own, Abdullah bin Hamad Al-Attiyah told The Telegraph on Monday. OPEC is mainly made up of Middle Eastern and South American oil producers and would need agreement from other oil-producing nations.
Global warming: While renewable energy still makes up only a fraction of global supply, places like Ontario are moving to alterative sources. As well, nations around the world are renewing efforts to lower their fossil fuel emissions in advance of a UN climate conference in Paris at the end of the year.
There are 18 comments. Show comments.