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Page added on June 7, 2016
‘We’re just not competitive’: Why the oil patch can’t cut its way to growth
No matter how much Canadian oil sands producers cut costs, John Stephenson argues it can never be enough.
While the CEO of Stephenson & Co. noted some players in the sector will be able to squeeze out tiny profits in a US$50 per barrel oil price environment – Husky Energy and Suncor Energy, for example, can operate with at least some margin for profitably with prices above the US$30 level – he stressed the oil sands’ economic heyday is over.
“I’m sure the last buggy-whip manufacturer had razor-thin margins and it would have done an excellent job of cutting costs,” Stephenson told BNN on Tuesday, “but it doesn’t really matter if there’s a systemic shift.”
Oil sands producers in northern Alberta have among the highest operating costs in the world. At the same time, limited market access due to ever-increasing controversies surrounding new pipeline proposals, combined with the higher cost of refining thicker oil sands bitumen, means those producers must also sell their output for some of the lowest prices in the world.
Western Canada Select, the most common grade of oil sands bitumen, typically sells for roughly US$15 per barrel less than the North American benchmark West Texas Intermediate price. That means oil sands producers are among the first to lose money when prices fall, which Stephenson said will make the sector struggle to attract investors in hopes of funding potential growth.
“It is not a growth sector, and one of the issues particularly for the oil sands is, if you’re sitting in London or New York or Hong Kong or Tokyo and you’re running institutional money, are you really going to think about being a shareholder in something that’s going to cost billions, take 10 to 15 to 20 years to realize a return and be in the high-cost production when price is under pressure and global growth is slow?” Stephenson said.
“I don’t think so.”
Producers have managed to shave roughly six dollars per barrel off their overall costs in the oil sands over the past year, but analysts have long been skeptical about whether those cuts will be sustainable over the longer term. Unexpected issues – such as the devastating Fort McMurray wildfire that forced more than half the region’s total production offline for weeks – can often send costs soaring.
Suncor said late Monday it would be able to return production back to pre-fire levels by the end of June and its operating costs would not exceed previously announced guidance of $30 per barrel. Syncrude, however, one of the largest oil sands production facilities that is now majority owned by Suncor, will see its operating costs jump 13 per cent as a result of the wildfire to as much as $44 per barrel.
When oil prices fell below US$30 per barrel earlier this year, TD Securities warned more than two thirds of Canadian oil producers were generating negative free cash flow, meaning they had to spend more to extract a barrel of crude from the ground than they received from buyers. In addition to oil sands production, that figure included the more than one million barrels of cheaper-to-produce and higher-priced lighter grades of crude Canada produces daily.
Analysts say any new oil sands projects will need oil prices to peak above US$70 per barrel to justify the multibillion-dollar investment, and new oil sands mines in particular – which are by far the largest job creators – would need prices in the triple digits to be economic. The National Energy Board has been forecasting since February that most of the growth in the oil sands would effectively stop by the end of this decade.
“Cost containment will absolutely be the matter of survival or not,” Stephenson said. “Because we are the highest cost producer in the world and in general – maybe not with Suncor or with some specific properties, but in general we’re the high cost producer.”
“And in a US$50 [per barrel], call it, oil market, forget it,” he said. “We’re just not competitive.”
19 Comments on "‘We’re just not competitive’: Why the oil patch can’t cut its way to growth"
shortonoil on Wed, 8th Jun 2016 6:56 am
“When oil prices fell below US$30 per barrel earlier this year, TD Securities warned more than two thirds of Canadian oil producers were generating negative free cash flow, meaning they had to spend more to extract a barrel of crude from the ground than they received from buyers. “
Everyone wants to talk about free cash flow; EBITDA and forget about full live cycle production costs. In the real world (that is outside the magical one of accountants gimmicks) cash flow can be positive and a company can still be going broke. By ignoring the cost of replacing reserves that are being extracted a company can be made to look attractive even though it is just a terminal patient waiting for the end. An extractive resource company that is not replacing its reserves is by definition going out of business!
By using ERoEI, and energy density data for the calculations the average full life cycle production cost of the petroleum industry can be determined to now be $125/ barrel. The price is around $50, so the industry is going broke by definition. We think that instead of concentrating on whether Company A thru Z still has a positive cash flow, it is time to start paying attention to what we are going to do when all these companies have gone broke. That will be when the well has run dry!
http://www.thehillsgroup.org/
Dustin Hoffman on Wed, 8th Jun 2016 8:34 am
Shortonoil…once I was driving along and read a bumper sticker
“Happiness is positive cash flow”
along with it another
“The difference between an oouu and an aahh, with a picture of a ruler”
Needless to say, a very attractive young woman was at the wheel of the car.
Seems it’s just humans being people, looking at the short term and what is in front of them at the moment.
Thanks for your post….most helpful
joe on Wed, 8th Jun 2016 8:40 am
Germany has been making oil out of coal since ww2, oil is not the real issue. Oil is a symptom of the aging and declining of populations in the west. Contraception and education has made us briefly rich and powerful, just as in history those civilisations willing to throw the weak litterally on the garbage pile to die (Romans, Greeks etc) become strong, but their wealth dilutes and divides. We westerners may never be this powerful again. There is an unspoken fear, that we need humans to consume, otherwise we collapse, its the essence of capitalism.
With contraception, abortion, and education, white people who once made up 80% of America are barely 60% if you believe offical figures, so replacement population is needed to physically grow the economy. If immigration never happened, the population would stop growing, start aging and pretty soon you would be Japan. Ok, but low on growth, low on opportunity, stable, and highly taxed. Thats all fine, except Big Business and crapitalists think such a life is a nightmare. Well go to Japan and see if life (not including sunamis and nuclear) is all that bad.
Old people drive less and use less and need more care. Just tranqing people is not an answer either. I imagine that soon, older more repugnant ideas will come to society as they have in europe, like legal suicide and eventually killing of the aged for economic benefits. We face an evil future.
GregT on Wed, 8th Jun 2016 9:46 am
Winnipeg Petro-Canada gas pumps run dry
“If you are looking to fill the tank, Petro-Canada gas stations in Winnipeg are running dry.”
“Gas shortages that began last week at Petro-Canada outlets in Alberta, Saskatchewan, Manitoba and B.C. are now spreading to Winnipeg and northwestern Ontario.”
“Petro-Canada’s parent company is Suncor.”
http://www.cbc.ca/news/canada/manitoba/winnipeg-petro-canada-gas-pumps-run-dry-1.3617846
Sissyfuss on Wed, 8th Jun 2016 9:49 am
Evil it will be, Joe.Your phrase,”we need humans to consume”, will have a completely different meaning in the future.
makati1 on Wed, 8th Jun 2016 10:38 am
Sissy, maybe it should read: “We need to consume humans”? Soylent Green anyone?
Anonymous on Wed, 8th Jun 2016 3:02 pm
People are peeing themselves locally here because stations are running out of gas. But, uS controlled stooges like the late harper and his low-iq buddies kept telling us ‘Canada’ is, or could, or will be, an ‘energy superpower’. How was this goal to be accomplished? By allowing uS corporations a free-hand to strip mine an area larger than most uS states and exporting what energy is left to the empires ‘homeland’ at rock bottom prices(spills, exploding trains and leaks no extra charge).
Getting back to the local shortages. Interestingly enough, the shortages have been made worse by people filling up their mobile trash cans on rumors there was a looming shortage. IoW, the rumors of shortages ensured possible shortages became actual shortages, and fast. Many stations around here sit dry atm. Of course, seldom asked is what benefit having a full tank of gas is, and how long that tank full will last. I guess if asked, people would just say, “I need to drive”, or get to work, w/e. Mostly though, they just need to drive, everywhere.
The fact that no economy, or way of living exists in here fat america, outside the drive-shop-consume one for over 99% of us, should be a major topic of discussion. Not private bathrooms for transexuals or the USlamic state, or who is going to get voted off the island next week…
Davy on Wed, 8th Jun 2016 4:40 pm
Dumbass Anaonomous, YO, we had this discussion already about your CanDian tar sands. They are mostly not American goofy. How hard is it for you to learn something? Do you have to be told twice?
Anonymous on Wed, 8th Jun 2016 6:22 pm
http://business.financialpost.com/news/majority-of-oil-sands-ownership-and-profits-are-foreign-says-analysis
Fucking retard
GregT on Wed, 8th Jun 2016 7:43 pm
I’ve read that US corporate ownership grew considerably since 2012 under the Harper regime Anonymous. If I can find a link I’ll put it up.
Davy on Wed, 8th Jun 2016 9:15 pm
Here are the biggest Canadian energy producers good luck breaking out the oil sands. As you can see the top foreign producers do not even hit the top 11 of the 100 largest energy producers list. My point all along is Canadian energy and the oil sands is not dominated by the US. The US is a component and important but we do not own your oil sands. As a Canadian start taking responsibility for your shit and quit blaming it on the US.
“The 100 largest oil and gas producers in Canada”
Alberta Oil Magazine’s 100 ranking for 2014
http://www.albertaoilmagazine.com/2014/05/the200-100-largest-oil-gas-producers-canada/
1 Suncor Energy Inc.
2 Imperial Oil Ltd.
3 Husky Energy Inc.
4 Cenovus Energy Inc.
5 Canadian Natural Resources Ltd
6 Syncrude Canada Ltd.
7 Encana Corp.
8 Harvest Operations Corp.
9 Pacific Rubiales Energy Corp.
10 Talisman Energy Inc.
11 Canadian Oil Sands Ltd.
“Top Foreign Oil Producers in Canada”
http://www.albertaoilmagazine.com/2014/05/top-10-canadian-subsidiaries-foreign-energy-producers-2/
ExxonMobil Canada
Shell Canada Ltd.
ConocoPhillips Canada
Devon Canada Corp.
Chevron Canada Resources
Marathon Oil Canada Corp.
Sinopec Canada Ltd.
CNOOC Canada Ltd.
Murphy Oil Corp.
Apache Canada Ltd.
GregT on Wed, 8th Jun 2016 10:35 pm
What % of Alberta’s oil reserves are owned by investors outside of Canada?
• Companies with foreign headquarters
Statoil: 99.83 per cent foreign ownership
Mocal Energy: 99.33 per cent foreign ownership
Murphy Oil: 99.23 per cent foreign ownership
Royal Dutch Shell: 98.49 per cent foreign ownership
Devon Energy: 98.44 per cent foreign ownership
ConocoPhillips: 97.83 per cent foreign ownership
• Companies with Canadian headquarters
Petrobank Energy Resources: 94.8 per cent foreign ownership
Husky Energy: 90.9 per cent foreign ownership
MEG Energy: 89.1 per cent foreign ownership
Imperial Oil: 88.9 per cent foreign ownership
Nexen: 69.9 per cent foreign ownership
Canadian Natural Resources Limited: 58.8 per cent foreign ownership
Suncor Energy: 56.8 per cent foreign ownership
Canadian Oil Sands: 56.8 per cent foreign ownership
Cenovus: 54.7 per cent foreign ownership
https://www.quora.com/What-of-Albertas-oil-reserves-are-owned-by-investors-outside-of-Canada
GregT on Thu, 9th Jun 2016 1:54 am
“Fucking retard”
Nope, a delusional, nationalist, flag waving, indoctrinated, Murican.
“The US is a component and important but we do not own your oil sands.”
We do not own your oilsands Davy? The US is a component and important?
Fuck are you ever a lost cause. You should never have been forced out of Daddy’s business. You fit right in.
GregT on Thu, 9th Jun 2016 2:21 am
Lots of help available Davy.
https://therapists.psychologytoday.com/rms/prof_results.php?state=MO&spec=166
Davy on Thu, 9th Jun 2016 6:06 am
Greg you are an ignorant (as in dick) Canadian indoctrinated at your earliest age to hate Americans. You whole identity is based on this and other bogus conspiracy theories. You are a hypocritical asshole that thinks he is “holier than thou” with social justice and climate change yet being a 1%’er and carbon dirty.
Greg, can you and your dumbass other Candick, Anonymous, answer the question are the ugly horribly polluting and environmentally destructive tar sands mostly American or a combination of American, Canadian, Asian, and some European? No, you can’t because they AIN’T DUMBASS.
You Candicks are friggen hilarious in your self-deception and lack of responsibility. Nothing is worse than a people that blame and complain when they themselves are filthy. That is “O”Canada bullshit to a “T”
GregT on Thu, 9th Jun 2016 9:23 am
“We do not own your oilsands”
You do not own the companies that control the oil sands that do not belong to us. There is no we or your about it Davy.
And you wonder why people call you delusional. Un-freakin believable.
Davy on Thu, 9th Jun 2016 9:52 am
Greg, slap yourself then ask the question to your dumbass ” is it right to say the oil sand producers are US owned and controlled. That is what the original question was to assswipe anti-American anonymous. No wonder you wonder why you are a dick. You blame others and complain about your own dirty laundry. This is a Canandian thing quit pushing the blame on the US you shifty whiner.
GregT on Thu, 9th Jun 2016 10:01 am
Lose the nationalism Davy. It’s clouding your ability to think rationally.
Davy on Thu, 9th Jun 2016 10:20 am
Typical shifty Greg. If you can’t beat them with facts spit on them with a derogatory superlative. You are a piece of work Greg.