A restrained optimism in Canada’s oil sands

Since the 2014 price collapse, many observers have leaned towards a pessimistic view on future attractiveness and growth prospects in Canadian oil sands. The cooling off of integrated oil company enthusiasm for the oil sands provides easy fodder for analysts and journalists trying to extrapolate an underlying industry trend. These notions are however oversimplifications of a more nuanced and complex story. While oil sands costs escalated relentlessly from the ramp-up in the early 2000s through 2014,  recent cost reductions are impressive, due to decreasing differentials, a lower Canadian dollar, lower operating costs, lower capital costs, lower natural gas costs, and lower condensate costs for diluent. With their backs against the wall and shareholders clamouring, producers are consolidating and adapting as they have in previous downturns to become lean manufacturers. Suppliers and the labour market are starting to follow suit, further driving down costs with more competition and less rent-seeking than during the boom years. And though oil sands production is far from being environmentally innocuous, the visually unappealing open face mines are being reclaimed and greenfield projects have halted, while the lower-land impact, but higher-emitting SAGD operations are becoming less carbon intensive. Therefore, whether one is bearish or bullish on oil sands growth is a matter of perspective. Oil sands producers and investors may have a number of reasons to feel sanguine. But rapidly falling costs, streamlined designs and operations, labour and supplier availability, technological improvements, environmental impact reduction, and (eventually) new exit pipeline capacity, all point toward some level of continued growth in the oil sands. Looking ahead, the most vital for further oil sands growth is that the cornerstone Canadian-based producers demonstrate success in driving down full-cycle production costs, even beyond what has been already accomplished.

By: Peter Findlay