The Canadian tar sands industry has lost a combined $25 billion over the last three years and is currently losing approximately $100 million a day.
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At current prices, Canadian tar sands oil producers are losing money on every barrel of oil they dig out. Despite signs earlier this year the industry would “turn profitable in 2018,” a much more likely scenario at this point is a fourth straight year of losses.
Producers are forced to keep cranking out product and selling it at a loss to cover the massive costs required to start one of these sprawling unconventional oil operations, a point made painfully clear when Alberta wildfires in 2016 forced some tar sands operators to shut down.
“I do think they'll start up quickly once the danger from the fire is gone because there is a lot of motivation to do that,” Jackie Forrest, an energy economist for Arc Financial Corp, told The Globe and Mail. “They have a lot of fixed costs so they're going to be motivated to get some revenue to pay for those costs that aren't going away.”
In the face of such challenging economics, what are Canadian tar sands producers doing? Tapping more oil than ever.
In June 2018 Canada set a new record for exporting oil to the U.S., hitting well over three million barrels per day. This record coincided with another one for oil exported by rail from Canada to the U.S. The U.S. is currently the only major market for Canadian crude, with 99 percent of its exports going to either U.S. refineries or ports for export.
Source: U.S. Energy Information Administration
America Is Maxing out on Canadian Crude
American refineries certainly enjoy buying Canadian crude at such low prices. How low are the prices? As the Financial Post reported in mid-October, Western Canadian Select (WCS) was $19 a barrel — approximately $50 a barrel cheaper than a barrel of the American oil standard known as Western Texas Intermediate (WTI).
Without a competing market in sight, American buyers likely will continue receiving huge discounts on Canadian oil. As Sandy Fielden, director of oil and products research at Morningstar, told Reuters in 2016: “If Canada can’t get their oil to another market besides the U.S. [market], you’ll always be a price taker, not a price maker.”
Even under these economic conditions, one company, Teck Resources, is proposing to build a new tar sands mining operation. Projections estimate the cost to produce a barrel of oil at this operation will be around $85 a barrel. That's quite the mismatch with what a barrel of Canadian crude oil is fetching these days, and doesn't bode well for a sustainable business model.
Another complicating factor is that even at such low prices, American refineries only want and need so much tar sands oil, which is a heavy, lower-quality oil. America is experiencing a boom in production of the light fracked crude oil from shale basins, which is not only more valuable to refineries but requires much lower transportation costs than importing crude from Alberta, the tar sands capital of North America.
As The Energy Mix reported recently: “Permian Basin oil is a far better fit for the only U.S. refineries capable of handling more bitumen [tar sands oil], and will likely be for at least the next decade.”
As an example of that preference, Exxon just announced plans to expand its Beaumount, Texas, refinery by 300,000 barrels per day, which would make it the largest refinery in America. This additional capacity is for light crude oil, not heavy Canadian oil.
Still, American refineries are importing, and refining, record amounts of Canadian oil right now, but at massively discounted prices compared to average global oil prices, which helps lead to huge profits for American refiners.
Yet another complication for tar sands producers is that, as The Energy Mix highlighted, “In reality, virtually every refinery in America that buys heavy crude is operating at full capacity. That is why there are no buyers willing to pay higher prices.”
Economics 101. If supply is higher than demand, prices go down. And sellers in that market have to take whatever price they can get, even if that means selling at a loss.
To help extract itself from this difficult situation, Canada is looking to build pipelines, such as the still-uncertain Trans Mountain pipeline expansion, to transport its landlocked oil to tidewaters, where companies theoretically can sell the oil to Asia's rapidly growing market.
Read more here: https://www.desmogblog.com/2018/10/25/canadian-tar-sands-oil-financial-losses