Production Costs Climb for Canadian Oil Sands, Companies Say

http://www.businessweek.com/news/2010-06-02/production-costs-climb-for-canadian-oil-sands-companies-say.html

By Marianne Stigset

(Bloomberg) -- The financial crisis and the global recession had limited effect on efforts to lower production costs for Canadian oil sands, companies including Statoil ASA and Canadian Oil Sands Trust said.

“Both operating expenditures and maintenance capital have been on a rising trend and when oil prices accelerate, that trend accelerates along with it and we got a very good taste of that in the last five years,” Marcel Coutu, chief executive officer of Canadian Oil Sands said today at an Oslo conference. “When oil prices crash, those operating costs unfortunately lag and it takes some time for them to come down.”

Labor costs have led an across-the-board increase, Coutu said in an interview. Weekly earnings in Alberta’s oil and gas industry have climbed 50 percent from 2002 to about C$1,800 ($1,700), according to the Canadian Association of Petroleum Products. For new projects, the capital costs per daily barrel of oil have climbed to $35,000 from $12,000 to $15,000 at the start of the decade, Robert Skinner, senior vice president at Statoil said in an interview.

The Norwegian company estimates break-even prices for projects using steam assisted gravity drainage technology at $65 to $75 a barrel, Skinner said. Cost for new supply is at $60 to $80 a barrel, depending on whether it’s from drilling or mining, Greg Stringham, vice president for oil sands at the petroleum association, said at the conference.

Demonstration Projects

Dwindling reserves in easier-to-access areas and rising oil prices are making sand and shale developments more attractive to producers including BP Plc and Royal Dutch Shell Plc. Canada’s oil sands, a mixture of sand, clay, water and a heavy oil called bitumen, contain the world’s second-largest proven concentration of crude at about 170 billion barrels.

Oil, which rallied 78 percent in 2009, has dropped 9 percent this year to about $72 a barrel in New York trading.

Statoil is working to lower costs through its demonstration Leismer project in Alberta, which is on schedule to start in the fourth quarter and may reach production of about 20,000 barrels a day by 2012, Skinner said. While the company was able to cut well costs, the next phases need to go through an internal capital valuation process, Skinner said.

“It’s not going to be until mid-decade before those will come on,” he said. “So it’s very much a step-by-step process still and learning as we’re going and making sure we get it right, driven not by schedule but by costs.”

Statoil, 67 percent owned by the Norwegian state, in 2007 bought North American Oil Sands Corp. for about $2 billion. The company in 2008 scrapped plans to invest in an upgrader plant because of costs. Upgraders turn bitumen into synthetic crude from which refiners can make gasoline, diesel and other fuels.

“We haven’t resurrected the application, the economics are not there,” Skinner said. The company’s “strategy is to look at the marketing of bitumen blends,” he said.

--Editor: Jonas Bergman, Will Kennedy

To contact the reporter on this story: Marianne Stigset in Oslo at mstigset@bloomberg.net;

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net