Canada Oil Sands Are Still a Gamble

Energy investors are showing their short memories, Breakingviews says. The stampede to the initial public offering of Athabasca Oil Sands is a tribute to the allure of Canada’s extra-heavy oil. Last week Athabasca priced at the high end of its range and raised $1.35 billion, twice its goal.

Yet, the publication says, it was only two years ago the sector was hit hard by the economy. Greater bullying of private oil companies by governments around the world makes it all too easy to forget the risks of another price slump, Breakingviews suggests.
Practically no energy portfolio is complete without exposure to Canada’s oil sands. The country accounts for half the world’s oil reserves that aren’t locked up by national companies of foreign governments. Including oil sands, Canada’s reserves are second only to Saudi Arabia’s — around 175 billion barrels.

The Dudley Do-Right factor also helps. Canada’s stable and predictable government is a rarity in the oil business, Breakingviews notes. True, the sand-rich province of Alberta irked producers in 2007 by demanding an extra cut from the sharp rise in prices. But this was nothing compared to the political risks energy companies are accustomed to in places like Nigeria, Russia and Venezuela, the publication says.

Even so, Athabasca investors seem merely to be swapping potential troubles, according to Breakingviews. The I.P.O. valuation — at about $1 for each contingent barrel — looks in line with the industry average as calculated by the research firm IHS Herold. But there is the looming possibility of environmental controls, the publication notes. Despite the industry’s best efforts, extracting oil from sands generates about 10 percent more carbon dioxide than conventional oil does. That could make the burden of greater regulation costly, Breakingviews suggests.

The economic hazards look dangerous, too, the publication argues. Oil sands stop being economical south of $65 a barrel. That proved especially painful for this corner of the business in 2008 when the price of oil fell below $35. Athabasca’s rivals Suncor Energy and Canadian Natural Resources lost 75 percent of their value while more diversified oil majors fell by much less. Some 90 billion Canadian dollars of the country’s sands projects were shelved. If the economy hits another serious bump, oil sands investors are likely to suffer the worst, Beakingviews says.