The cost of building and operating oilsands projects has fallen dramatically in the last five years, making the sector competitive with other crude sources, but pipeline constraints will slow production growth in the years ahead, a new report concludes.
Washington-based IHS Markit, in a new report authored by Calgary-based vice-president Kevin Birn, says the cost to construct new oilsands projects has fallen by from 25 to over 33 per cent since 2014, while operating costs for both SAGD and mining projects have fallen by more than 40 per cent.
IHS says the plunge in capital costs is due to a number of factors, including efforts to simplify project designs, more rapid construction and the start of production and overall deflation.
The energy consulting firm says operating costs have fallen as a result of increased reliability, with less downtime and increased throughput, with that slashing costs by as much as 50 per cent.
“It is important to note that the largest share of these cost savings are coming from structural changes; the way projects are designed, constructed or operated,” said Birn, in a press release.
“These types of savings tend to be more permanent. This means that oilsands costs have a greater potential to remain in check should inflationary pressures resume.”
IHS concludes that the cost improvements have lowered the breakeven oil price - the price required for a project to earn a 10 percent return on investment - for new oilsands projects or expansions.
The firm estimated that the lowest cost oilsands projects, expansion of existing plants, required a more than $65 WTI per barrel crude price to break even in 2014. Today, thanks to the cost cuts, that breakeven price has fallen to the mid $40 WTI per barrel range. It concludes that an oilsands mining project without an upgrader needed a near $100 WTI per barrel price in 2014 to break even, compared to $65 in 2018.
However, despite these cost cuts, IHS says pipeline constraints will mean growth in oilsands production will proceed at a slower pace than might otherwise be the case. It believes oilsands production additions per year will average 100,000 bbls/d over the next decade, down from an average of 160,000 bbls/d in the 2009-2018 period.
Despite that decline, it concludes that oilsands production will reach 4 million bbls/d by 2030, up one million barrels from 2018.
“Oilsands economics have improved dramatically over a short period,” Birn said. “Still, ongoing constraints continue to weigh on timing of future investments and the investment growth outlook continues to moderate. But growth is still anticipated.”
IHS said one-third of the production growth to 2030 will come from ramping up of facilities and optimization of existing plants.
Despite the reduced outlook, IHS sees the potential for more growth.
“There is upside potential, but the key will be the ability of government and industry to restore confidence that Canadian crude will get to market, whether by pipe or rail,” Birn said.