The plunge in world oil prices in recent weeks has been dizzying. As with all major changes in prices, there are winners and losers in this situation. The biggest potential losers, of course, are the highest-cost oil producers -- Canadian tar sands, "tight oil" and "shale oil," etc. Thus, according to investor website "Seeking Alpha," the ongoing oil price plunge should be making investors in Canadian tar sands "very very nervous." Key points from "Seeking Alpha" include:
- "'Black Friday' offers new meaning to desperate oil bulls as their last-ditch hope - OPEC cutting production - just failed."
- "High-cost producers are vulnerable. Say 'goodbye' to your dividend and earnings... perhaps your equity too, if oil ends up at $50."
- "...we think the Saudis also know that $70 oil mostly wipes out their US shale 'competitors' - and our opinion is, the oil price will go low enough that it will kill off for a decade the massive flow of funds into the sector."
- "...this [oil price] decline could last a lot longer - a couple years....And as anyone who follows gold stocks has observed, 'a couple years' can be a most painful experience."
- Canadian Oil Sands Limited's "total cost of per barrel oil production [is] over $85" per barrel, compared to current crude oil prices under $70 per barrel.
- "Here's why COSWF bulls should be very, very nervous": "The shift in the WTI futures price curve began this past summer, and we believe it is a quantum, generational, shift... the day of reckoning has come. We do not see much improvement for years."
Also note this Reuters article, which cites an International Energy Agency report that "Canadian synthetics (oil sands) projects have the highest percentage of production of the types examined here (about 25 percent) that would fall into a negative net present value if there were to be an extended period of prices below [$80 per barrel]." And check out this Toronto Star column, which argues, "Oops. There go the tarsands," and along with them Canadian Prime Minister "Stephen Harper’s entire resource-based approach to the economy." And then there's this article by Desmog Canada, which reports:
If oil prices continue their slide downward, the cancellation of high-cost oilsands projects are likely, but just because prices rebounded in the past and investment returned, does not mean that is a guide for the future, warns James Leaton, research director of the Carbon Tracker Initiative.
Thursday night at the Royal Ontario Museum in Toronto, Leaton told the crowd of over 170 people the Alberta oilsands are a big target for investors looking to reduce risk because of the high capital expenditure (capex) costs.
“The oilsands are Canada’s elephant in the atmosphere,” said Leaton, an originator of the “carbon bubble” theory. “We see investors moving away from high-cost, high-carbon projects, so there is a challenge that capital is not going to automatically flow to Alberta anymore.”
All in all, this situation is "a pretty big shock" to Canadian tar sands producers. That includes "Suncor Energy Inc. and Canadian Natural Resources Ltd., which each fell the most in at least three years yesterday, [and which] operate in one of the most expensive places on earth to produce oil."
The bottom line is this: you don't have to be an economic genius or an oil market expert to understand that if it costs $85 per barrel or higher to produce heavy, dirty tar sands oil that currently is selling for around $52 per barrel, you're probably not going to be making much money operating or investing there. To the contrary, you probably want to be running as fast as you can away from that entire sector, particularly if you think oil prices will stay low for an extended period of time. No wonder why "Seeking Alpha" says Canadian tar sands investors should be "very very nervous" at this point.