Canada's Oil Sands - Centre for Energy

Economics
Oil sands development depends mainly on two factors: the cost of producing and
transporting the products, and the price buyers are willing to pay. Crude oil prices are
determined by global supply and demand and change with the weather, politics and other
factors. For Western Canadian producers, refining capacity and competition in the midcontinental
U.S. and Canadian markets are also key considerations.
Photo courtesy of
Syncrude Canada Ltd.
The high demand for labour
in the oilsands region has also
alleviated unemployment
across the country.
Operating costs – the labour, natural gas and other goods and services needed to produce
a barrel – comprise about half of the supply cost for producers. In addition, companies
have to earn enough to repay the capital they invested in the project, pay royalties and
taxes to government, reclaim the sites and set aside funds for research, maintenance and
new developments. The developers have invested billions of dollars in the projects, and
they must attempt to earn a competitive return on this investment. Judging by the scale
of current and proposed activity, companies generally believe that oil sands projects are
worthwhile long-term investments.
A number of factors affect the profitability of oil sands projects. Major influences include
the exchange rate of the Canadian dollar, fiscal terms and operating expenses such as initial
capital costs, crude prices and natural gas, material and labour costs. As well, because of
unique challenges, different projects will have differing operating costs.
The operating costs for conventional light oil in Western Canada are considerably lower
than for upgraded oil sands bitumen, but conventional producers also have to invest
continually in exploration for new reserves, which can add substantially to their costs. After
a few years of production, the volume produced from a conventional well begins to decline
and the operating costs start to rise, whereas this is not the case with oil sands mining.
Operating costs in the oil sands mining projects are partly dependent on the price of
natural gas used to generate steam and electricity and to produce hydrogen in associated
upgrading facilities. If ways can be found to reduce or eliminate natural gas use, then
costs could be reduced significantly. Wages and salaries are another major component of
operating costs for mines and upgraders as they employ large numbers of skilled workers.
The operating costs to produce oil sands bitumen vary considerably. In 2011, the Alberta
Energy Resources Conservation Board estimated plant gate supply costs of $47 to $57 per
barrel for steam-assisted gravity drainage projects, compared to $63 to $81 per barrel
for stand-alone mining projects and $88 to $100 per barrel for integrated mining and
upgrading projects. The Canadian Energy Research Institute (Study 122) estimated the cost
for new SAGD and stand-alone mining projects at $93 per barrel and integrated mining and
upgrading projects at $100 per barrel. The amount of natural gas used to generate steam
and the recovery rate are the key factors. The availability of condensate and light oil to
dilute bitumen can also affect markets for these products. The price of bitumen generally
increases in the spring and summer when a lot of road-building and construction activity
requiring asphalt is under way. The spread between the price of heavy and light oils is
called the differential.
The provincial government, which owns the mineral rights to virtually all of the oil sands
resources, has recognized the long-term benefits of development in shaping royalty
arrangements for their “owner’s share” of revenues from oil sands. Alberta established a
stable “generic” oil sands royalty system in 1997 after decades of negotiating project-byproject
arrangements. Under the generic system, the province collected one per cent of
18 CANADA’S OIL SANDS THIRD edition November 2011