As Oil Prices Erode, Tar Sands Become Riskier Investments

Research group says 90 percent of Canadian tar sands investments need oil prices above $95 a barrel to make economic sense.

Oil sands digger in Alberta, Canada. At least two-thirds of the tar sands enterprise is at risk if current low oil prices persist, a new report says. Credit: Shell

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As oil prices sagged again on Monday to a four-year low, the Carbon Tracker Initiative said the recent downward spiral “changes the whole dynamic” for Canada’s tar sands production.

The “vast majority” of potential capital expenditures on tar sands projects that are still in the earliest phases of development would require such high oil prices that they are “particularly risky,” the group said.

Hundreds of billions of dollars could be spent on projects that are underway or in development, Carbon Tracker said. At least two-thirds of the tar sands enterprise is at risk if current prices persist, or if they drop even lower.

“We believe shareholders should be concerned at this potential level of expenditure and should consider whether it is prudent to risk such large amounts of capital on high cost projects that need high oil prices to be commercial,” the report said.

Some 92 percent of this prospective tar sands production would need a price of at least $95 per barrel to make sense, given the risks. And “virtually all” of it needs at least $75 per barrel. These calculations include a $15 margin of safety above the estimated break-even cost of production, since it would not be prudent to invest in a project that would only break even.

The report was based on prices for Brent crude, which are slightly higher than the U.S. benchmark West Texas Intermediate price. (Tar sand crude, in turn, trades at a discount to WTI.) In trading on Tuesday, WTI touched $75 briefly and closed at $77.

The report: