Costs of Canadian Oil Sands Projects Fell Dramatically in Recent Years; But Pipeline Constraints and other Factors Will Moderate Future Production Growth, IHS Markit Analysis Says

WASHINGTON–(BUSINESS WIRE)–The cost of building and operating oil sands projects has fallen
dramatically in recent years and total oil production is expected to
rise by another 1 million barrels per day (mbd) by 2030. But external
factors—such as price uncertainty caused by pipeline constraints—are
contributing to a more moderate pace of production growth than in years
past, a new report by business information provider IHS
Markit
(Nasdaq: INFO).

The report, entitled Four Years of Change, examines oil sands
cost and competitiveness in the years following previous IHS Markit
research on the topic. The report and previous oil sands research is
available at www.ihsmarkit.com/oilsandsdialogue.

The cost to construct a new oil sands project is anywhere between 25
percent and a full one-third cheaper than in 2014, the report says.
Deflation in capital costs was a factor. But reengineering—efforts such
as simplifying project designs, building for less, and more quickly
constructing and ramping up production—has also played a major role in
the reductions.

The costs associated with the operation of oil sands projects have
fallen even more dramatically. Operating costs for both oil sands mining
operations with an upgrader and steam-assisted gravity drainage (SAGD)
facilities fell by more than 40 percent on average from 2014 to 2018.
Increased reliability—reducing facility downtime and increasing
throughput—was the biggest factor in the cost savings, which went as
high as 50 percent in some cases.

“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 Kevin
Birn
, vice president, IHS Markit – who heads the Oil Sands Dialogue.
“These types of savings tend to be more permanent. This means that oil
sands costs have a greater potential to remain in check should
inflationary pressures resume.”

These cost improvements have lowered the breakeven oil price for new oil
sands projects—the price of oil required for a project to cover and earn
a return on investment, the report finds. IHS Markit estimated that the
lowest-cost oil sands project (expansion of an existing SAGD facility)
required a more than $65 per barrel price for West Texas Intermediate
(WTI) crude to break even in 2014. Today, the breakeven price has fallen
to the mid-$40 per barrel range. Likewise, an oil sands mining project
without an upgrader required a near-$100 per barrel breakeven price in
2014 compared to around $65 per barrel in 2018.

Despite these sizeable cost reductions, the western Canadian oil market
continues to move through a period of price uncertainty due to
significant delays for advancing pipeline projects, the report says. The
lack of transport capacity forced many producers to take deep discounts
for their barrels late in 2018.

In 2018 the western Canadian heavy oil differential averaged $27 per
barrel below the WTI price—more than double what it was in 2017. Over
the course of a year the differential fluctuated wildly from $11 per
barrel to more than $50 per barrel beneath WTI—the worst level in
recorded history. Since then the Alberta government has imposed an oil
production cap and differentials have generally trended in a narrower
range. However, should Alberta continue a process of loosening the
production limits in the coming year the differentials are likely to
widen again, the report says.

Growth in the Canadian oil sands will continue, albeit at a slower pace,
the report says. IHS Markit expects over the coming decade year-on-year
oil sands production additions will average beneath 100,000 barrels per
day (b/d) per year—down from average annual rate of 160,000 b/d or more
during 2009-2018. The reduced production outlook will nevertheless be
sufficient for oil sands to top 4 mbd by 2030, a million barrel per day
increase from 2018.

“Oil sands economics have improved dramatically over a very short
period,” Birn said, “Still ongoing constraints continue to weigh on
timing of future investments and the investment and the growth outlook
continues to moderate. But growth is still anticipated.”

“Nearly one-third of growth in the IHS Markit outlook to 2030 comes
simply from the ramp up, optimization and then sustaining of existing
facilities. 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.”

Four Years of Change and all other Oil Sands Dialogue research is
available to download at www.ihsmarkit.com/oilsandsdialogue.

About IHS Markit (www.ihsmarkit.com)

IHS Markit (Nasdaq:INFO) is a world leader in critical information,
analytics and solutions for the major industries and markets that drive
economies worldwide. The company delivers next-generation information,
analytics and solutions to customers in business, finance and
government, improving their operational efficiency and providing deep
insights that lead to well-informed, confident decisions. IHS Markit has
more than 50,000 business and government customers, including 80 percent
of the Fortune Global 500 and the world’s leading financial institutions.

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Contacts

News Media:
Jeff Marn
IHS Markit
+1 202 463 8213
Jeff.marn@ihsmarkit.com

Press Team
+1 303 858 6417
press@ihsmarkit.com

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