Canadian oil sands costs had moderated following years of cost escalations, but an IHS report said realities associated with the 2014-15 oil price collapse could see shift in oil sands’ relative competitiveness with other key sources of supply.
The new IHS oil sands dialogue report, entitled “Oil Sands Costs and Competitiveness,” explored past, present, and future trends and what a changing business environment could mean for the future competitiveness of oil sands investment.
“Prior to the oil price collapse, oil sands were competitive with other key sources of supply in the medium to high cost range, depending on the type of project,” said Kevin Birn, senior director of IHS Energy. “Lower prices are now lowering costs globally—including in the oil sands. In this paradigm, oil sands’ competitiveness position may shift—for better or worse.”
Oil sands production more than tripled—from 600,000 b/d to more than 2.3 million b/d—in 2015 from 2000, making oil sands a pillar of global supply growth.
IHS expects oil sands output will continue to rise to 3 million b/d by 2020, largely through the completion of projects that were already under construction.
As output grew, the cost to construct projects rose more than 70% during 2000-14 because many projects were truly first-of-a-kind, with limited access to labor and services in a region that lacked sufficient infrastructure, the report said.
Labor costs contributed to historical oil sands cost escalation given that labor is the largest component of oil sands projects and the most susceptible to regional pressures. But overall cost pressures had moderated in recent years, in part from weaker steel prices.
Compared with 2014, operating costs are down 20% and capital costs are down 6%. IHS estimated breakeven prices for oil sands projects fell by about $5/bbl on average in 2014 and could be down by another $5/bbl by Dec. 31.
With sufficient infrastructure in place and labor and service markets expanded after more than a decade of strong investment and production growth, future production growth will be driven by the expansions, the report said.
IHS expects that more than 70% of oil sands production growth during 2015-20 will come from expansions.
“Now that significant infrastructure has been built over the past 15 years, the oil sands industry is shifting to a new period where success will be measured by efficient operation of existing facilities,” Birn said. “Growth will be driven by incremental expansions. The current lower oil price environment is abetting this transition as new projects are delayed and producers increasingly focus on best practices and operational excellence.”
Lower oil prices—which have fallen to half or less of 2014 levels—could shift the relative competitive position of oil sands, the report said. This could mean that, among companies that invest globally, projects in other regions could be prioritized over Canadian oil sands.
However, several factors—in addition to the shift toward the expansion of existing projects over new ones—support ongoing investment in the Canadian oil sands, the report said.
Those factors include anticipated lower labor costs in the future. Companies are redesigning projects to lower costs by reducing scale of future projects plus lowering maintenance and operating costs through greater standardization of project designs and replacement parts.
Service sector capacity has expanded with oil sands growth, and modular fabrication capacity has expanded greatly. Modular design allows projects to be constructed in pieces and then later assembled onsite.
“Oil sands’ competitive position will not only be shaped by the efforts of the oil sands industry, but also regional and global conditions—including changes to other sources of supply in the world,” Birn concluded. “The current level of prices will further drive innovation for cost efficiency. The challenge facing the oil sands is how much producers can lower their cost structures and, in the future, the degree to which the pace of cost escalation can be successfully managed.”
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