With Some Tar Sands Oil Selling at a Loss, Why Is Production Still Rising?

Like a supertanker unable to make quick turns, production from tar sands in the Canadian oil patch continues to increase despite prices so low producers have to sell their output at a loss.

The industry's inability to cut production could have a profound impact on the climate as well as corporate bottom lines.  Despite reductions in greenhouse gas emissions across Canada, continued tar sands oil production will most likely keep the nation from meeting targets it set as part of the international climate accord agreed to in Paris.

Energy-intensive tar sands production in Canada that requires steam to liquefy and extract the oil is expected to increase by 9 percent in 2016, according to the Canadian National Energy Board. Yet the oil currently sells for less than the cost of production when transportation costs are figured in, according to a detailed analysis by RBN Energy LLC, an industry consulting firm.
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Alberta's tar sands are the third-largest oil reserve in the world after Venezuela and Saudi Arabia. Proven reserves in Alberta total 166 billion barrels, 24 times the amount consumed by the U.S. in 2014, according to the U.S. Energy Information Administration.  Tar sands yield a heavy, thick, low-quality oil that requires significantly more energy to extract and refine than conventional crude. Producing tar sands oil emits three to four times more greenhouse gases than ordinary oil, according to a 2008 U.S. Department of Energy report.
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When crude oil prices were hovering around $100 a barrel five years ago, the tar sands industry could project attractive returns on investment in extracting and transporting the oil to market by rail or pipeline.  But with the fracking-driven energy glut of recent years, the price of tar sands crude has plunged to $20 a barrel, obliterating the economic calculations that launched the industry.

The RBN Energy analysis focused on transportation costs.  Pipeline capacity limitations and growing production volumes are increasingly forcing producers to transport tar sands oil to Gulf Coast refineries by rail, which costs about $6 a barrel more than pipelines would charge.  

As of Feb. 8, producers paid an estimated $20.50 a barrel to ship the oil to Houston, first by truck and then by rail, but received just $20 a barrel for the product.  When the cost of chemicals required to dilute the crude to make it less viscous were factored in, producers lost $2.74 a barrel, according to the analysis.  Producers able to ship by pipeline came out slightly better, making $2.97 per barrel after transportation fees.

However, the cost to keep energy-intensive production facilities running is $5 a barrel, on top of the transportation costs, RBN Energy estimated.

"Whichever way you look at it, there are some operations that are now losing money on every barrel," the report concluded.

Suncor Energy, Canada's largest oil producer, reported a net loss of $2 billion in the fourth quarter of 2015.  Imperial Oil, another tar sands giant, reported earnings of $1.1 billion in 2015, down from $3.8 billion from a year earlier
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Yet tar sands production has continued to increase because the wells represent long-term investments that can't be shuttered without significant financial losses.

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