Oil prices continue to nosedive and analysts predict further losses unless producers do something to stabilise the market. The price of Brent, the international benchmark, on October 18 was $84.54 (Dh310.26) a barrel, or over $30 less than its level in June. This is perhaps the lowest since November 2010.

The oil sands of Canada — which have raised production in the last few years driven by the high level of prices and would have continued to do the same into the future — are now considered at risk of losing the drive due to the high cost of development and operations. Production has increased by more than 1 million barrels a day (mbd) since 2000 and was expected to increase by an additional 2 mbd by 2035. With current prices and the direction they are likely to go, this is doubtful.

On September 25, CBS News reported the announcement by Statoil postponing its oil sands project in Alberta because of rising cost and the limited opportunities to get the oil to the market. The CBS report added: “The costs of oil sands projects are rising because of construction and labour costs, while the price of oil is 20 per cent lower than it was six months ago, making large investments less viable.”

On August 15, the Canadian Press admitted that the costliest energy projects are in Alberta and some could be cancelled “without higher oil prices”. Its report is based on a study by the Carbon Tracker Initiative, which “highlighted 20 of the biggest projects around the world that need a minimum oil price of $95 a barrel to be economically viable” and that “Most on the list require prices well north of $110 a barrel and a few in the oil sands even need prices higher than $150 [a barrel]”.

It is true that the Carbon Tracker Initiative is environmentally driven, but its comprehensive report cannot be ignored even though the operator of Foster Creek project said that his company’s supply cost is between $35-$65 a barrel, a range that raises questions since it is for the same field.

It seems that oil sands developers were alarmed even before the price fall, and in May, Total and Suncor Energy “decided to indefinitely defer their $11 billion Joslyn North mine in Alberta because the economics just weren’t good enough”.

If it were developed, Joslyn would have produced between 150,000-160,000 barrels a day, very low when compared with the result of a similar investment in our region.

Let us go back further to March 2013, when Suncor Energy cancelled its Voyageur oil sands upgrader, a joint venture with Total, saying that “market conditions have changed significantly, challenging the economics of the project”. Considering how oil prices have evolved, they must be very happy to have made that timely decision.

Cost

It is clear that most of the above decisions were taken well before the current precipitous fall in oil prices, suggesting that these projects need prices higher that $110 a barrel. However, oil producers, especially Opec’s, should not be carried away as these indicators may be good for the long run evolution of supplies, while current oil sands production is unlikely to be affected unless if oil prices fall further.

The reason is that operating projects would continue to work even if they generate their cash cost only. The cost of investment is “sunk” and would be paid even if the operations stop. Therefore, oil sands producing companies are worried about the availability of transportation capacity to markets as well as the fall of global oil prices.

The expansion of some pipelines to the US and the wide use of rail car tankers have made it easier for additional volumes to be marketed even in winter.

Lorraine Mitchelmore, President of Royal Dutch Shell in Canada, an active producer and upgrader of oil sands, said in August that Brent below $70 a barrel would be “a challenge”. But she told Reuters that she sees no risks to production at current prices, which were higher than what they are now.

Surprisingly, some oil sands producers are more optimistic about oil demand and price recovery as reported by Reuters. Producers are also encouraged by the fact that while West Texas crude prices faltered, Canadian prices were saved by falling differentials, thus keeping Canadian prices steady.

The differential used to be $21 a barrel in mid-June, and much more before, and now is only around $14. Falling Canadian dollar exchange rate is also helping because the cost is computed in Canadian dollars while the revenue from exports is in US dollars.

The market then should not in the short run expect much help from Canadian producers.