(Bloomberg Opinion) -- At a time when crude prices are close to their highest levels in 14 years, Big Oil is turning its back on some of its biggest reserves.
BP Plc this week announced it would sell out of the Sunrise project, a Canadian tar sands joint venture that produces about 50,000 barrels a day. That can be chalked up as a victory for environmental campaigners who’ve sought to drive oil majors away from such projects. Equinor ASA sold out of a similar Canadian project last year, while Shell Plc and ConocoPhillips sold assets several years ago. Chevron Corp. and TotalEnergies SE also have projects that may be on the block.
On paper, bitumen and oil sands deposits like those in Canada’s Athabasca region are some of the biggest reserves of petroleum anywhere on the planet. Venezuela’s Orinoco belt contains roughly the same amount of crude as Saudi Arabia. The Athabasca reserves come next.
Yet there’s always been an asterisk attached to the tar sands. While their reserves numbers seem enormous, their economics have always been dicey. If international oil companies are quitting them now, it’s not because of any attempt to clean up their image (BP, for instance, is taking an offshore oil project as part-payment to its partner Cenovus Energy Inc. for its Sunrise stake.) It’s because they can see through current high crude prices to a future where barrels are cheaper, and tar sands can no longer turn a reliable profit.
Such deposits aren’t quite like anything else in the oil industry. In many places, crude is extracted not via wells but with dump trucks and open-cast pits that resemble coal mines more than oil fields. Elsewhere, the heavy viscous crude must be broken up with steam and chemicals to produce something liquid enough to be pumped to the surface. That’s an energy-intensive process. Whereas conventional methods produce oil containing about 20 gigajoules of energy for every gigajoule used in extracting it from the ground, the type of tar sands found at Sunrise get just four or five gigajoules.
As the world of 2022 is well aware, energy is cost — and the expenditure needed to extract crude from the Canadian prairie is higher than anywhere else in the world.
When energy consultancies produce a rundown of the most competitive projects, it’s tar sands (along with still-more marginal ones such as coal-to-liquids or gas-to-liquids) that typically occupy the costliest bit of the curve. When prices dip, the producers at the top start losing money first. That’s why the Gulf’s secure position at the bottom of the global cost curve has made it the linchpin of energy markets for half a century.
Margins are made even tighter by the fact that the resultant crude is a lower-quality heavy sour product, which is hard to get to global markets thanks to the lack of pipeline capacity out of Canada. Compared to Maya, a Mexican crude of similar quality, Western Canadian Select oil trades at a persistent, and substantial, discount.
It’s striking that one other flavor of high-cost petroleum is in ruder health. America’s shale oilfields are enjoying a resurgence that should push their production back to record levels in the next few weeks. Their costs tend to be lower than tar sands, but only marginally so. Why, then, do they remain more attractive?
The answer is time. A shale well is short-lived, with output peaking in a matter of months and typically declining to zero in a year or so. Tar sands, on the other hand, are multi-decade projects, that may only start to recoup their initial capital investment after many years in production. That makes them a high-stakes bet on the long-term direction of the petroleum market.
There’s good money to be made from crude right now, whether it’s extracted from the Texas plains, the Canadian prairie, or the Saudi deserts. Demand looks to finally be recovering to pre-pandemic levels. A circumspect oil producer, however, will worry not just about the state of demand in 2022, but where it will be in 2025, or 2030, or beyond. Seen through that lens, the problem with high-cost, long-life tar sands isn’t that they’re despoiling a pristine environment or pumping additional molecules of carbon dioxide into the atmosphere, but simply that their economics are too marginal.
If you’re bullish on the long-term prospects for crude demand, 2022’s price environment represents a great time to invest in the world’s biggest reserves. If you’re bearish, it represents a great time to sell out of them. It’s telling that international oil companies with a choice about where to dedicate their capital are choosing the latter.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
David Fickling is a Bloomberg Opinion columnist covering energy and commodities. Previously, he worked for Bloomberg News, the Wall Street Journal and the Financial Times.