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Oil quicksands

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Published: November 13 2008 15:03 | Last updated: November 13 2008 19:38

Had crude prices remained above $100 a barrel for any length of time, Canadians may have taken to calling their country “Saudi Canadia”, perhaps replacing the maple leaf with an oil derrick. It was only a slight boast to say that Canada had the second largest recoverable oil reserves in the world by virtue of its oil sands, or that Venezuela, with similar deposits, was number one. Development prospects look less attractive now, though, as crude hovers around $55 a barrel – almost two-thirds below its recent peak.

Suncor, the biggest oil sands producer, has pruned its budget by a third even as investors have slashed its value by almost two-thirds. Others, such as Royal Dutch/ShellNexen and EnCana are also re-evaluating the future. The frenzied rate of investment that had turned a small Canadian town such as Fort McMurray into a sub-Arctic El Dorado with rapid inflation and scarce housing is unlikely to continue without more certainty on crude prices.

When the boom was picking up steam earlier this decade, the cost of a new project was as low as C$30,000-C$50,000 per barrel of annual output. Now it is four times as much. Variable costs have soared too because extracting bitumen is energy and labour-intensive. And, unlike other types of development, oil sands development must take place in big chunks costing billions. There is also the risk of environmental sanctions, given the awful greenhouse gas emissions of oil sands production.

Still, it is too soon to write the industry’s epitaph. As development wanes, costs will moderate too. Existing facilities and those under way can easily cover variable costs, and they are already a meaningful part of the North American energy mix. Just as Saudi Arabia could swing oil markets when they got too low in the good old days, now it may be “Saudi Canadia” and others putting an involuntary floor under the market.

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EDITOR’S CHOICE

In depth: Oil – Oct-30

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