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    US oil plays threaten Canadian oil sands margins

    The Canadian oil sands industry may once again be forced to table projects as it did in 2008 and 2009 when the global recession added to difficulties already faced by the industry. In addition to high operational costs, declining oil prices, and a skilled personnel shortage, oil sands projects now face competition from growing tight oil production from US oil plays – particularly North Dakota’s Bakken, noted Wood Mackenzie in a recent report.  

    In 2008 and 2009, more than $80 billion in oil sands development projects were shelved, reworked, or canceled as oil prices fell below $40 a barrel and financing all but dried up. Today, the industry predicts oil sands output could hit 3 million barrels a day by 2020, up from the current 1.6 million, and investments have rebounded, but oversupply issues may surface as the largest risk threatening oil sands margins.  

    Oil sands companies and the one million barrels per day output expected by 2015 will face stiff competition from growing US unconventional resource plays. Production from the North Dakota Bakken alone is forecast to double to 1.2 million barrels of oil per day (bopd) in the same time.

    Competition will come in the form of pipeline space and storage facilities in a country known to be the largest importer of Canadian crude.

    "A lack of visibility on available transportation capacity and, in turn, the prices that may ultimately be achieved could impact oil sands projects' commercial viability," said the authors of the June 4 report.

    While the report authors anticipate capacity sufficient to export Canadian volumes until 2016, infrastructure constraints, particularly in the US Midwest, pose a real challenge to the market for Canada’s oil exports. Several proposed pipelines and expansions—including the Enbridge Lakehead System, TransCanada’s controversial Keystone pipeline, and the connection of Kinder Morgan’s Express Pipeline into the Platte line at Guernsey, WY—are key to alleviating the oversupply, noted the report.

    According to Wood Mackenzie, the WTI breakeven price for an average North Dakota Bakken well stands at under $60/bbl. Under a 10 percent discount rate and a 40 percent bitumen differential to WTI, the average unsanctioned stream assisted gravity drainage with little or no capital expenditures to date breaks even at the WTI price of $60/bbl, and a mining extraction project at around $80/bbl. Integrated projects with an associated upgrader breakeven at a WTI price over $100/bbl.

    According to Wood Mackenzie’s report released June 4, "Oil sands projects display some of the highest break-evens of all global upstream projects. The potential for wide and volatile differentials could result in operators delaying or cancelling unsanctioned projects. Pure-play oil sands companies without hedges in place, such as a US downstream position, are the most exposed."

    Large producers pumping oil sands crude using steam-assisted gravity drainage (SAGD) technology with cash costs of production hovering around $25 a barrel or less will feel less financial strain than those utilizing oil sands mining.

    Most at risk are small, heavily-indebted oil sands producers and unsanctioned projects such as expansions at Horizon, Kai Kos Dehseh's Corner phase, Narrows Lake, Fort Hills and Joslyn.

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