In situ cash operating costs now $7-8/b, set to drop another 20-30% over next decade
My guest on this Markham On Energy podcast is someone I interview regularly about the Alberta oil sands, especially to explain the economics of an industry that is difficult for outsiders to understand. Kevin Birn is the IHS MarkIt director of the Oil Sands Dialogue. He holds an undergraduate degree in business and a graduate degree in economics from the University of Alberta. Prior to joining IHS, Birn held various senior positions with the Canadian Department of Natural Resources. His expertise includes Canadian oil sands development, oil sands cost and competitiveness, Canadian pipelines infrastructure, crude oil markets, crude-by-rail, crude oil life-cycle analysis and Canadian energy policy.
The oil sands has always been considered a high cost, marginal barrel of oil. While that may have been true even up to a few years ago, the reality is changing rapidly as producers respond to the challenge of a low price environment that this time may be structural instead of cyclical.
But the reputation is hard to shake.
When Stanford lecturer Tony Seba released his highly publicized study on electric vehicles and Transportation as a Service a few months ago, he estimated the impact of reduced demand on what he considered high cost oil production and concluded that the oil sands would be one of the first basins displaced by electricity. “…more than half of oil production in Canada” will be stranded, according to Rethinking Transportation 2020-2030: The Disruption of Transportation and the Collapse of the Internal-Combustion Vehicle and Oil Industries.
Last May, when I debated Dr. Gordon Cornwall of the Green Party of Canada in Vancouver about the oil sands and the Trans Mountain Expansion, my explanation of how the oil sands was driving down costs was dismissed as a “technical trick.”
There’s nothing tricky about new technologies. Birns explains how both the in situ producers (e.g. Cenovus) and the miners (e.g. Suncor, Imperial Oil) are innovating to become more competitive.
In fact, on the in situ side, costs are so low now – with cash operating costs in the $7 to $8 range – that the best producers are competitive with the second tier of American shale producers, according to Birn.
And those costs are likely to drop another 20 to 30 per cent over the next decade.
It’s time to change the image of the Alberta oil sands.