Oil sands cash flows to fall by $23 billion, Wood Mackenzie says

February 25, 2015

EDINBURGH, Scotland -- The operational cost of extracting bitumen from Canada's oil sands tops out at $37/bbl for in-situ projects and $40/bbl for mining projects, according to Wood Mackenzie's latest analysis.

Callan McMahon, principal analyst for Wood Mackenzie, says this is amongst the highest of all project types globally. "With low oil prices, the oil sands region's cash flows will fall by $23 billion in 2015 and 2016 combined," he adds.

Wood Mackenzie forecasts that capital spend in the region will fall by $1.5 billion over the next two years (4% from fourth-quarter 2014 assumptions), but it sees limited impact on production.

"Even if projects temporarily operate at a loss, shut-ins are not expected; and with the costs sunk, projects totaling 458,000 bpd of bitumen are set to start production in 2015-2016," explains McMahon.

In addition, the analysis highlights that decreased investment will show post-2017, and the 4 MMbpd peak bitumen production previously expected in 2020 by Wood Mackenzie has now been pushed out to 2024.

The following are other key considerations from Wood Mackenzie's latest key play analysis:

The oil sands remain viable long term: An average point forward breakeven for an on-stream in-situ project is $41/bbl and the average point forward breakeven for an on-stream mine is $47/bbl (WTI indexed), but full-cycle breakevens can exceed $100/bbl for both project types.
Larger and diversified companies better positioned to weather the storm: Imperial, CNRL, Suncor and Shell each still hold over $20 billion in post-tax remaining NPV10 in the region.
The price impact on value is massive: To date, over $35 billion of value has evaporated from the region. And, if prices stay low, at a $60/bbl real flat price deck, Wood Mackenzie calculates that another $121 billion could be at risk, which equals the Eagle Ford shale's remaining value.
Companies looking for the exit might find limited options: The large amount of investment made in the past decade by the potential suitors and the unique expertise required to successfully develop this high cost resource are both significant headwinds.