Approximately $120 Billion in Planned Construction Spending Scheduled in Canada's Oil Sands Patch Won't Ease Pain of $90 Crude Oil

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Researched by Industrial Info Resources (Sugar Land, Texas)--The development of Canada's oil sands is now the center of international attention. The high price of crude oil and security concerns regarding the current net crude oil producers are continuing to be a driving force in bringing this resource to market. Alberta's economically recoverable oil sands reserves currently stand at 178 billion barrels and are second only to Saudi Arabia. Some estimates put the total recoverable resource above 300 billion barrels. High prices could be the norm for several years due to the tightening global supply and demand balance. The economic expansion of China has been a driving force of higher prices, and if India continues on its expansion course, high crude oil prices could continue well beyond the historic cyclical prices.

Because of the current high price of crude, oil sands reserves have changing from being uneconomical only a few years ago to being a desired feedstock for several U.S. refiners. Current bitumen production from oil sands is just more than 1 million barrels per day. Many major expansions at existing facilities and even more facilities under construction or in development could bring production of bitumen to more than 3 million barrels per day by 2015 and to more than 5 million barrels per day (BBL/d) by 2025. The growth plan would be even more aggressive if this development scheme were not in a province with a population of fewer than 3.5 million people, which has caused a huge increase in demand for labor, materials and engineering & construction services.

Billions of dollars have been spent in the last several years in the oil sands patch in Alberta. Expect this to continue and increase exponentially over the next several years. It is estimated that between 2007 and 2015 that more than $125 billion will be spent in this sector. The projects will range in size from the $190 million 10,000 BBL/d Steam Assisted gravity Drainage (SAGD) facility to the larger intergraded bitumen production and synthetic oil production facilities with phased developments of 180,000 BBL/d and costing in upwards of $14 billion.

This all sounds good, but the real problem today is that it takes years to bring an oil sands project to fruition. It takes time to acquire the land, perform the exploration drilling in order to firm up the potential resource, execute permitting, organize and engineer construction timelines with skyrocketing labor costs, just to bring 10,000 or 30,000 or 50,000 BBL/d of production online. The capital costs are now $30,000 per barrel a day of production or more.

Today, crude oil crossed over $90 per barrel in trading, and there is still no end in sight. Some issues, such as international sanctions against Iran, Wednesday's drop in crude inventories and the lingering tension between Turkey and the Kurds are applying pressure in an ever-tightening crude oil market. These might be thought of as tactical issues when compared to more strategic issues like the growth in demand in China and future demand growth just on the horizon in India.

The total global demand and supply of crude oil has tightened up in the last few years. In the fourth quarter of 2006, total global demand outstripped the crude oil supply by a margin of 830,000 BBL/d. In the first quarter of 2007, the trend continued, and the difference between supply and demand increased to a daily average of 1.3 million BBL/d of crude oil demanded over the current capacity of supply. In the second quarter of 2007, the trend swung the opposite direction with a daily average global supply of 84.5 million barrels and a daily demand of 84.4 million barrels. The trend was reversed, but the surplus over daily demand was a shabby 90,000 BBL/d. The net effect of the last three quarters is a cumulative net demand over supply of approximately 168 million barrels of crude oil or the rough equality of approximately two days of global crude oil production.

This crude oil production has forever been lost to the supply side of the equation as surely as the crude oil production in the Gulf of Mexico was lost to the supply side after the devastating hurricanes Katrina and Rita struck in 2005. OPEC may have turned on the valves to ease the price pain caused by these storms, but let us remember that OPEC only cut a little of this production back afterward. Now the hangover from this is becoming clear. Our ability to produce enough crude oil on a global basis is eroding. The supply was turned on and now demand has caught up with it and threatens to eclipse it in the long-term.

Some other scenarios are brewing in the background that could make this supply and demand equation look even worse. First, India has had some very healthy growth numbers in the last several quarters. Lest we forget that there are more than a billion people on the subcontinent and they are poised for growth as China was several years ago. As India wakes up, it will demand all the basic infrastructure needs China did, such as cement, steel, chemicals, electrical generation facilities and many refined petroleum products. Second in line are the political problem production areas of the Nigerian Delta, Venezuela and Iraq. These areas have not flared up as of late, and the only question here is whether the price of crude has it already built in. I think not after seeing the price swing on the announcement of U.S. sanctions against Iran. A third scenario almost happened in the recent past when radical factions who are against the ruling royal family of Saudi Arabia attacked certain crude oil installations in that country. If the attack had succeeded then it is possible that over 8 million barrels of crude oil-treating facilities could have not only been taken offline but could have resembled a smoldering heap of twisted steel. There goes 10% of the world's supply of crude oil.

So where is the price of crude oil going? Will it continue to rise until the world's economies are shaken up and start to slow down, or will it just be this way until new supplies like Canada's oil sands come online or Congress eases its grip on letting companies drill in areas like the Anwar in Alaska or other current no-drill zones? The fact still remains that the larger discoveries announced as of late almost all seem to be further offshore and in deeper waters. There does not seem to be one easy answer to the current problem. One thing is for sure though, competition for the world's resources will only get stiffer in the near future and the debt laden U.S. is now one among many countries clawing for those resources.

Industrial Info Resources (IIR) is the leading marketing information services company for the industrial process, heavy manufacturing and energy-related markets throughout the world. For more than 24 years, IIR has provided accurate and timely intelligence through products such as plant and project information databases, focused market databases, industry forecasting, key industry contacts, industry and territorial map products, direct marketing services and applications, and daily industry news.