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Providing coverage of Alaska and northern Canada's oil and gas industry
November 2009

Vol. 14, No. 48 Week of November 29, 2009

One more thing for oil sands

Study says geopolitical events will determine sands development rate, markets served, upgrading, what environmental costs imposed

Gary Park

For Petroleum News

As if the Alberta oil sands don’t have enough on their plate, figuring out economic and environmental challenges, a new study has tossed geopolitical ingredients into the mix.

A joint report by the London-based Center for Global Energy Studies and Calgary-based Geopolitics Central says global geopolitical events will determine the rate at which the oil sands are developed, which markets they serve, how much is upgraded in Alberta and what environmental costs will be imposed.

Geopolitics President Vincent Lauerman said the study authors felt that other oil sands’ assessments, by ignoring the global and Alberta politics, were delivering “very different conclusions.”

In applying two plausible global scenarios, he said the study was able to present a more complete picture of the industry’s upside and downside, whether synthetic crude oil or bitumen blend would be in greater demand and the impact on markets if Alberta was to legislate in-province upgrading.

Growth could be moderate

In a “moderately optimistic scenario,” the global economy is assumed to grow at an average annual rate of 3.6 percent from 2009 to 2020, but falls short of the extremely strong growth experienced in the 2004-07 period, primarily because of stricter financial regulations and tighter credit conditions.

The study says those circumstances would allow production projects that are already in advanced stages of planning to continue as crude oil prices increase and credit conditions ease.

That slower pace of construction activity in Alberta, North America and worldwide, accompanied by lower prices for materials such as concrete and steel and the time available to plan projects would result in a significant reduction on capital costs for surface mining and in-situ projects over the shorter term.

But the passage of time would see oil sands producers incur higher environmental mitigation costs, with the Alberta government forced to impose stiffer regulations to “slay the ‘dirty oil’ lobby.”

In this scenario, oil sands output would nearly triple to 3.2 million barrels per day in 2020, with mining volumes up by 160 percent or 1.01 million bpd and in-situ up by 169 percent or 980,000 bpd.

Or recession could be prolonged

In a “moderately pessimistic scenario,” the study assumes geopolitical competition among major powers dominates, leading to a prolonged global recession and sees an authoritarian bloc led by China and Russia challenging Western powers, causing a second recession in 2010, substantially slowing sustainable growth.

Global economic growth would average 2.2 percent a year from 2009 to 2020 and many oil sands production projects would be delayed two or more years, while others would be cancelled because of low crude prices and tight credit.

Full-cycle project costs would fall as a result of lower construction costs, including wages and materials, and lower energy costs and oil sands companies would simply pay the environmental costs rather than adopt the carbon capture and storage strategy.

Production would double to 2.4 million bpd in 2020, with mining up 71 percent or 450,000 bpd and in-situ up 127 percent or 740,000 bpd.

The U.S. market would receive no more than 590,000 bpd of new exports under either scenario, the report suggests.

Lauerman said he leans more toward the “moderately optimistic scenario” because a “lot of great things have happened on the international cooperation front to rescue the global financial system and economy.”

He said the study has attracted considerable attention, much from “unexpected sources,” notably China and Russia.

Window for lower costs

A separate study by the North American Energy Partners, which provides construction services to the oil sands sector, said the current slowdown, affecting about C$150 billion in potential investment, has lowered costs for labor and equipment, but that window may be in danger of closing.

Kevin Mather, a vice president of the partnership, said increased competition in the labor market has benefited everyone by stabilizing base labor rates, which he does not expect will change.

A glut of used heavy equipment around the world also creates opportunities to buy trucks at good prices, while a worldwide shortage of tires (which saw the cost of tires for some oil sands trucks soar to C$200,000 each from C$40,000) is over.

Mather also said a stronger Canadian dollar is hurting producers who sell their oil in the U.S., but helping contractors who buy imported equipment priced in U.S. dollars.

He said it is absolutely critical for contractors to be involved from the outset of project planning and engineering if projects are to remain on budget.






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