Conventional wisdom has always held that oil sands are the most expensive way to produce oil, and to an extent, that has been accurate – 10 years ago we were looking at projects with breakeven points at US$95 per barrel. When prices collapsed in 2014 oil sands looked set to be a clear loser, and many obituaries were written. Some were even justified.
Since 2014, however, oil sands have seen a quiet revolution. In place of stripping out millions of tonnes of overburden and sand with 400 tonne trucks producers have adopted steam assisted gravity drainage (SAGD). SAGD quickly halved capex costs per flowing barrel, and they have fallen further since. SAGD also slashes labour costs.
If we take tax and royalties out of the picture new SAGD projects are now seeing lifting costs at around US$20 per barrel. To be sure, export costs are still higher than elsewhere, but oil sands have already begun to look like a low-cost resource when compared with anywhere outside the Gulf.
This month we cover a new competitor to SAGD, which is planning to use RF energy in place of steam as a heat-source. If it works as expected (and a scale test is about to start) then another US$10 could come off lifting costs. Oil sands at US$10 per barrel might give even US tight oil some sleepless nights.
Costs are only one leg of the stool. Located in safe Canada oil sands carry almost zero political risk. The third leg – size of reserves – is long and strong. Alberta alone claims 160 billion barrels – enough to run current production of 3 million bpd for over 150 years.
The fourth leg – market – was once guaranteed but is now more tentative. The days when Canadian oil sands were simply sent south to flow into the US’s gaping import gap are almost past. The US will import a measly net average 2.5 million bpd this year, and is spoiled for choice. Within two years the US will become a net oil exporter. Oil sands producers are already worrying about where to find their next market, and the general choice is to “go west, young man”. The 8,500 km route from British Columbia’s coast to China is about the same as the 8,500 km route from the Gulf (though with a different set of geopolitical choke points).
As so often, innovation is the driver of change. Oil sands innovation is on the point of being the new disrupter of the Oil Price Equilibrium. The team and I are proud to present all the industry changing technology in the March edition of InnovOil.