September 19, 2014 / 8:44 PM / 4 years ago

Who's afraid of falling oil? Not Canada's oil sands yet

CALGARY, Alberta, Sept 19 (Reuters) - Canada’s oil sands industry is shrugging off declining world oil prices as some of the world’s highest-cost producers find a cushion in strong demand and a weakened domestic currency.

The companies that mine and drill the world’s third-largest crude reserve in northern Alberta are sanguine about the latest round of falling oil prices, arguing that costs have dropped and that domestic prices are firm even as world prices falter.

“There’s an impression that the oil sands is the marginal barrel,” said Brian Ferguson, chief executive of Cenovus Energy Inc, one of Canada’s largest oil sands developers. “Yes, some of the projects are more marginal but the majority of the big producing projects, the majority of the resource, is very economic.”

The price of West Texas Intermediate (WTI) oil, the North American benchmark, has dropped 13 percent since mid-June to just over $92 per barrel, while Brent oil, the international standard, is down 15 percent to around $98 per barrel.

Canadian producers have avoided much of the pain wrought by those price drops. The price for Western Canada Select, the heavy crude from the oil sands, is trading for about $14 per barrel under WTI, compared with $21 under the benchmark in mid-June, while the Canadian dollar has weakened from about C$1.08 to the U.S. dollar to around C$1.10 currently.

Oil sands producers’ costs are in weak Canadian dollars, while their revenue is generally in robust greenbacks.

Receiving $78 dollars per barrel for their heavy oil leaves a comfortable profit for most, but not all, producers, with the smallest projects usually bearing the highest costs. The Alberta Energy Regulator says thermal projects, where steam is pumped into the ground to liquefy tarry bitumen deposits, can break even within a WTI price range of between $55 and $85 per barrel.

Mining projects, which are on a much larger scale but mostly produce more valuable synthetic crudes, need North American prices of $75 to $105 per barrel, the regulator estimated.

Still, Lorraine Mitchelmore, president of Royal Dutch Shell Plc’s Canadian unit, which operates a mining and upgrading project in the Alberta oil sands, said last month that Brent below $70 (per barrel) would be “a challenge”, but at current prices she sees no risks to production.

To be sure, low prices may persuade oil sands operators to lower capital spending in the near term and defer big projects if they see weakness over the long term, but most will continue to produce oil to cover as much of their costs as possible, even if it means racking up a loss.

“If there’s a drop in oil prices next year it will have virtually no impact on oil sands production,” said Michael Dunn, an analyst at FirstEnergy Capital. “It’s a fixed-cost game. In the U.S. $80 (per barrel) versus $90 will make a large difference in the number of shale oil wells drilled.” (Reporting by Scott Haggett; Editing by Peter Galloway)

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