The Carbon Tracker Initiative, the UK-based non-profit organization which has done much to put ‘stranded assets’ on the investment agenda, has warned that investors in Canadian oil sands risk losing money on expensive projects if oil prices weaken in the coming years.
It has commissioned consultants Energy Transition Advisors (ETA), the firm founded by former DB Climate Change Advisors Head of Research Mark Fulton, to compile a report on future Canadian oil sands projects capital expenditure (capex) and production.
The report, Oil Sands: Fact Sheets, says that investors in Canadian oil sands are at heightened risk of companies wasting $271bn of capital on projects in the next decade that need high oil prices of more than $95 a barrel to give a decent return.
CTI says the near $30 drop in IPE [International Petroleum Exchange] Brent crude oil prices over the past few months, after a period of relative stability around the $110 mark, demonstrates the vulnerability of future high-cost projects. The report says this drop gives shareholders the opportunity to demand transparency on the price ranges major projects requiring investment decisions fall into.
Investment bank Goldman Sachs recently revised its estimate for Brent crude to $80-$85 a barrel for 2015. But the report finds that 92% of future oil sands projects need a market price of $95 a barrel.
“If lower oil prices around the current $85 mark prevail, this will pose significant challenges to the business models of companies relying on opening up new oilsands projects,” said Andrew Grant, financial analyst and lead author of the report at Carbon Tracker.
The listed oil sands specialists – including Suncor, CNRL, Cenovus, and MEG — have around a third of potential capex above the $95/barrel threshold, which limits their options going forward.
Further, the oil sands projects researched by ETA would struggle to deliver enough product in the future, according to the report. It estimates that the projects researched would deliver around 2.0 million barrels per day (bpd) of production in 2030, when the Canadian Association of Petroleum Producers (CAPP) forecasts production of 4.8 million bpd by 2030.
CTI adds that a number of international oil companies – Royal Dutch Shell, Total and Statoil – have already shelved oil sands projects this year, citing poor economic factors and delays to new pipeline access to overseas markets.
It says investors need to challenge the economic logic of these future projects in the face of volatile and weakening oil prices before approval by company executives.
“The economics of oil sands are getting more challenging. We expect to see more stranded assets, as expensive projects get shelved with no viable route to market,” said James Leaton, research director at Carbon Tracker. Link
The ‘stranded assets’ debate aside, RI this week ran run a report from Nina Hodzic, Senior ESG Specialist at ING Investment Management, outlining the ESG issues of the Canadian oil sands.