Canadian oil sands: Falling costs begin to kick in, just as prices rise

We’ve been hearing for some time that input costs for oil production will begin to follow oil prices downwards – and oil services companies such as Schlumberger laying off staff certainly supported that. However it has cost savings haven’t become apparent very quickly, mostly because of existing contracts that were set at higher prices than the current oil prices. BP in late April it had seen costs fall 11 per cent, and now Shell says it is seeing signs of cheaper services now.

From Reuters:

“As far as projects are concerned and normal operating costs, we see a
lot of our renegotiations … enter with lower costs at this moment,” Chief
Executive Jeroen van der Veer said on the sidelines of an industry conference in
Abu Dhabi.

More interestingly, the vast Canadian oil sands reserves, which suffered a big fall in investment as oil prices fell too low to support the expensive extraction process required, might be back in play.

Also from Reuters:

In a research report, Andrew Potter of UBS Securities said labor and material prices in the oil sands region of northern Alberta have fallen far enough that producers may look to revisit projects that were mothballed when the recession pushed oil prices down from July highs of more than $147 a barrel.

Last fall, Potter estimated that new projects in the region, which contains the largest oil reserves outside the Middle East, needed oil prices of between $80 to $100 a barrel to be economic. Now those projects may be profitable at current oil prices, which ended on Monday at $68.58 a barrel.

For oil producers it may be perfect timing, if they could benefit from the fall in contract prices and then prices continue to rise.

Of course if those who believe the recent price increase is driven by speculation and other external forces – and may even fall back – are correct, such a sweet spot may not be  coming just yet.

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