Back to the sludge
03-10-2009
Oil sands investment: Oil sands are back in focus. Canada’s huge but expensive reserves fell out of favour as oil prices plummeted from their 2008 peaks. But a crude price hovering back around $70 a barrel makes investment attractive once again — especially if recovering demand and dwindling supply support the price or push it higher.
Canada has the world’s second largest reserves of oil. Most of it is in sludgy oil sands, making it expensive to extract and purify. While some longer established companies can make money at $60 a barrel, the average breakeven price is closer to $70 and can go as high as $90 for a new project, according to CIBC analysts.
That explains why the sands were all the rage in the run-up to last year's oil price peak of around $145 a barrel. But when oil prices fell sharply, dropping below $35 in December, a number of projects were delayed. Oil sands investment is projected to drop by nearly half in 2009 from the prior year, according to the Canadian Association of Petroleum Producers.
Now crude prices have perked back up and have held around $70 a barrel for the past two months. So attention is likely to return to the oil sands. Investment might still be cautious - some analysts predict another drop in the oil price in the short term. But longer term, emerging markets where per capita consumption is still relatively low could drive increases in demand. At the same time, the marginal cost of supply is likely to rise because new discoveries tend to be expensive — Brazil’s pre-salt fields, for example, make economic sense only at some $60 per barrel or higher.
Canada's reserves are already drawing a lot of interest from China, a big consumer of oil. Investments in Canadian energy assets have made up 45 per cent of China’s energy buys so far this year, CIBC reckons. Most recently, PetroChina shelled out C$1.9 billion ($1.8 billion) for a 60 per cent stake in two oil sands projects. If oil holds steady at or above current prices, other investors will also be drawn back into the muck again.
www.business-standard.com
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