Oil Major: 70% Of Crude Can Be Left In The Ground

Canada’s oil sands are too dirty to be produced, and should probably stay in the ground.

That has long been the sentiment of environmental groups, but it is also gaining acceptance even among some of the largest oil companies in the world.

“A lot of fossil fuels will have to stay in the ground, coal obviously … but you will also see oil and gas being left in the ground, that is natural,” Statoil’s CEO Eldar Saetre told Reuters in an interview. “At Statoil we are not pursuing certain types of resources, we are not exploring for heavy oil or investing in oilsands. It is really about accessing the most carbon-efficient barrels.”

Meanwhile, Statoil is under pressure at home on another front: its Arctic wells in the Barents Sea have come up dry, capping off a highly disappointing drilling season.

If heavy oil and oil sands are to be left unproduced, then a lot of oil will need to stay in the ground. According to the USGS, about 70 percent of the world’s discovered oil reserves are in the form of heavy oil and bitumen. Much of that comes from Venezuela – one of the last places in the world that an oil company wants to do business in these days – and Canada.

Last year, Statoil abandoned Canada’s oil sands, selling off its assets to Athabasca Oil Corp. But Statoil is hardly alone in the exodus. ConocoPhillips unloaded a whopping $13.3 billion of oil sands assets to Cenovus Energy earlier this year. Shell sold off $4.1 billion in oil sands assets to Canadian Natural Resources. Meanwhile, ExxonMobil wrote off 3.5 billion barrels of oil sands from its book in February, admitting that they were unviable in today’s market. French oil giant Total SA decided earlier this year to halt funding for the Fort Hills oil sands project, led by its partner Suncor Energy. Fort Hills is the last major oil sands project to come online that was built from scratch, and it will bring an additional 190,000 bpd of new supply to the market by next year.

To be sure, the overarching motivation for many of these asset sales is one of economics. Expensive oil sands, especially for greenfield projects, no longer make sense when executives are looking to allocate scarce capital. Oil sands projects can last for decades, and can even have relatively low operating costs, but the expense of upfront development is massive.

ConocoPhillips’ CEO said that it would no longer invest in any oil project that needs a breakeven price of $50 or higher, according to the FT. Conoco’s CEO Ryan Lance said that much of the company’s new investment will be directed into U.S. shale. “You don’t even get through the door unless you are below $50 cost of supply, and you don’t really get to the table in the capital allocation fight unless you are $40 a barrel or below,” he said.

The economics of shale remain questionable – the bulk of the shale industry has racked up debt and posted very little profit. The unique feature that shale has, however, is that it takes very little time to drill a shale well and bring it online. Oil sands, on the other hand, take years. “You need to have a large part of your capital programme that’s flexible in a given year or two, to deal with volatility in the [oil] price,” Conoco’s Lance said, according to the FT.

The exodus of the oil majors from Canada does not mean that oil sands production is heading down. Far from it. The IEA sees Canadian output jumping by 900,000 bpd by 2022, putting production well above 5 million barrels per day (although that depends on sorting out pipeline issues, a pesky problem for Canada’s oil sands industry).

Nevertheless, it does highlight the growing pressure on the industry to reduce its exposure to long-lived, carbon-heavy projects. The proposal from Norway’s sovereign wealth fund to divest from oil and gas stocks is a clear sign that investors are becoming more and more concerned about their long-term exposure to oil assets, particularly those with a high-emissions profile.

For Statoil, which is partly owned by the Norwegian government, the message is clear. A future of carbon constraints essentially means new oil sands will be off limits. “Investment sentiment towards carbon is starting to harden and it does need to be part of the decision making,” Tom Ellacott, senior analyst at consultancy Wood Mackenzie, told Reuters. “There is an economic perspective as well with the risk of future carbon taxes which you are more likely to be impacted by if you have a carbon-intensive portfolio,” Ellacott said.

By Nick Cunningham of Oilprice.com