Oil Sands Economics

Oil Sands 101 PresentationOil Sands 101 Presentation

Calgary Calgary Ass’nAss’n of Lifelong Learnersof Lifelong Learners

and and

Petroleum History SocietyPetroleum History Society

Paul PrechtPaul PrechtEnergy Economist and ConsultantEnergy Economist and Consultant

5 February 20135 February 2013

Peter Lougheed on Oil Sands Peter Lougheed on Oil Sands Development : Development :

“It’s out of control, and we’re all “It’s out of control, and we’re all going to pay a price for it”going to pay a price for it”

Paul Precht Energy Economics Ltd.

going to pay a price for it”going to pay a price for it”

Speaking at University of Alberta, March 7, 2007Speaking at University of Alberta, March 7, 2007

Slide 2 5 February 2013

Outline of Presentation

��Oil sands economic indicatorsOil sands economic indicators

�� Production Production

�� InvestmentInvestment

�� PricesPrices

Paul Precht Energy Economics Ltd. 5 February 2013

PricesPrices

�� CostsCosts

�� RoyaltiesRoyalties

��Oil sands outlookOil sands outlook

��Economic RentEconomic Rent

�� Risk of rent dissipationRisk of rent dissipation

Slide 3

Alberta Liquid Petroleum Production 1967-2011 (millions of bbl/day)

1.0

1.5

2.0

2.5

Paul Precht Energy Economics Ltd.Slide 4 5 February 2013

Source: ERCB

0.0

0.5

1.0

1967 1972 1977 1982 1987 1992 1997 2002 2007

Bitumen Upgraded Crude Oil C5+

Oil Sands Production History1967-2011 (millions of bbl/day)

0.6

0.8

1.0

1.2

1.4

1.6

Paul Precht Energy Economics Ltd.5 February 2011

Slide 5

Source: CAPP

0.0

0.2

0.4

0.6

1967 1972 1977 1982 1987 1992 1997 2002 2007

Bitumen from In Situ Bitumen from Mining

SCO from In Situ SCO from Mining

Oil Industry Upstream Investment ($ billions)

20%

30%

40%

50%

60%

$10

$15

$20

$25

$30

Paul Precht Energy Economics Ltd.Slide 6 5 February 2013

Source: CAPP

0%

10%

20%

$0

$5

$10

1997 1999 2001 2003 2005 2007 2009 2011

Conv Oil & Gas Oil Sands Oil Sands as % of Total

Oil Sands Investment ($ billions)

$10

$15

$20

$25

Paul Precht Energy Economics Ltd.Slide 7 5 February 2013

Source: CAPP

$0

$5

$10

1997 1999 2001 2003 2005 2007 2009 2011In-situ Mining Upgraders

Crude Oil & Bitumen Prices ($/bbl)

$60

$80

$100

$120

$140

Paul Precht Energy Economics Ltd.Slide 8 5 February 2013

Source: Calculations based on US DOE, Company Postings, Bank of Canada

$0

$20

$40

2005 2006 2007 2008 2009 2010 2011 2012

Brent $Cdn WTI $Cdn WCS CL Bitumen

Crude Oil Price Differentials ($/bbl)

$20

$30

$40

$50

$60

$70

Paul Precht Energy Economics Ltd.Slide 9 5 February 2013

Source: Calculated

$10

$0

$10

2005 2006 2007 2008 2009 2010 2011 2012

Brent-WTI Mthly Brent-WTI Ann Avg

Brent-WCS Mthly Brent-WCS Ann Avg

Brent-Bitumen Mthly Brent-Bitumen Ann Avg

Crude Oil Price Differentials (%)

60%

75%

90%

105%

Paul Precht Energy Economics Ltd.Slide 10 5 February 2013

Source: Calculated

30%

45%

2010 2011 2012

WTI as % Brent WTI as % Brent (Annual Avg)

WCS as % WTI WCS as % WTI (Annual Avg)

Bitumen as % WTI Bitumen as % WTI (Annual Avg)

Oil Sands Cash Operating Costs ($/bbl)

$20

$25

$30

$35

$40

$45

Paul Precht Energy Economics Ltd.Slide 11 5 February 2013

Source: Company Annual Reports

$0

$5

$10

$15

$20

1999 2001 2003 2005 2007 2009 2011COS Ltd Suncor

Cost Indices: 2000=100

100

150

200

250

300

Paul Precht Energy Economics Ltd.Slide 12 5 February 2013

Source: Statistics Canada, IHS CERA, Company Annual Reports

0

50

100

CPI - CA CPI - AB UCCI UOCI COSL/Suncor

Oil Sands Capital Cost Inflation

Paul Precht Energy Economics Ltd.Slide 13 5 February 2013

Source: RBC Capital

Supply Costs ($/bbl)

$30.50

$44.75

$89.62

$61.05

$40

$60

$80

$100

Paul Precht Energy Economics Ltd.Slide 14 5 February 2013

Source: CERI

$15.64

$30.50

$15.48

$0

$20

$40

SAGD Mining & Upgrading Stand-Alone Mining

2004 2012

$8

$10

$12

$14

$16

$18 FHMT

Rentals &

Fees

Bonuses &

Lands Sales

Coal

SCO &

Alberta Non-Renewable Resource Revenues - $mmActual Forecast

Paul Precht Energy Economics Ltd.

$2

$0

$2

$4

$6 SCO &

Bitumen

Crude Oil

Nat Gas &

By-Products

ARTC/Drilling

Stimulus

Slide 15 5 February 2013

Source: Alberta Treasury Board & Finance

40%

60%

80%

100%FHMT

Rentals &

Fees

Bonuses &

Lands Sales

Coal

Alberta Non-Renewable Resource Revenues - %Actual Forecast

Paul Precht Energy Economics Ltd.

-20%

0%

20%

40%SCO &

Bitumen

Crude Oil

Nat Gas & By-

Products

ARTC/Drilling

Stimulus

Slide 16 5 February 2013

Source: Alberta Treasury Board & Finance

Alberta Non-Renewable Resources Revenues Shares

30%

40%

50%

60%

70%

80%Actual Forecast

Paul Precht Energy Economics Ltd.Slide 17 5 February 2013

Source: Calculations based on Alberta Treasury Board & Finance

0%

10%

20%

1999-00 2001-02 2003-04 2005-06 2007-08 2009-10 2011-12 2013-14

NRRR as % of Total Rev

Oil Sands Roy as % of NRRR

Gas Roy as % of NRRR

4.0

6.0

8.0

10.0

12.0

800

1,200

1,600

2,000

2,400

Ro

yati

es $

bil

lio

ns/y

r

Pro

du

cti

on

106m

3/y

rAlberta Crude Oil & Oil Sands

Royalties and Production

Actual Forecast

Paul Precht Energy Economics Ltd.

0.0

2.0

4.0

0

400

800

Ro

yati

es $

bil

lio

ns/y

r

Pro

du

cti

on

106m

3/y

r

Crude Oil Production Oil Sands Production

Crude Oil Royalties Oil Sands Royalties

Slide 18 5 February 2013

Source: ERCB, Alberta Treasury Board & Finance

$2.00

$3.00

$4.00

$5.00

Alberta Crude Oil & Oil Sands Royalties ($/bbl)

Actual Forecast

Paul Precht Energy Economics Ltd.

$0.00

$1.00

$2.00

Crude Oil SCO & Bitumen

Slide 19 5 February 2013

Source: Calculations based on ERCB, Alberta Treasury Board & Finance

Oil Sands Production Forecasts (b/d)

3,000,000

4,000,000

5,000,000

6,000,000

Paul Precht Energy Economics Ltd.Slide 20 5 February 2013

Source: CAPP, NEB, ERCB, CERI

0

1,000,000

2,000,000

2013 2018 2023 2028 2033

CAPP NEB ERCB CERI

Oil Sands Employment

13329

3977

4933

20,000

25,000

30,000

35,000

40,000

Paul Precht Energy Economics Ltd.Slide 21 5 February 2013

Source: Petroleum Human Resources Council

8217

16801

8110

3977

0

5,000

10,000

15,000

2011 2021In situ Mining Upgrading

Peter Lougheed on Oil Sands Peter Lougheed on Oil Sands Development : Development :

“It’s out of control, and we’re all “It’s out of control, and we’re all going to pay a price for it”going to pay a price for it”

Paul Precht Energy Economics Ltd.

going to pay a price for it”going to pay a price for it”

Speaking at University of Alberta, March 7, 2007Speaking at University of Alberta, March 7, 2007

Slide 22 5 February 2013

Economic Rent

Economic Rent

Supply Curve

- sum of all plays,

all with different

costs

Market

Price

Price

Per unit

Difference between

Market Price and

Projects with

low economic

rent

Non-viable Projects

- supply cost

exceeds market

price

Paul Precht Energy Economics Ltd. 5 February 2013

Exploration Cost

Development Cost

Operating Costs

Return on Investment Supply Cost

- life cycle

economics of

individual

play

Economic Rent

Quantity of Supply

Projects with

high economic

rent

Market Price and

Supply Cost

Slide 23

Oil Sands Equities vs Price per BblOil Sands Equities vs Price per Bbl

$20

$40

$60

$80

$100

$80

$160

$240

$320

$400

Paul Precht Energy Economics Ltd.Slide 24 5 February 2013

Source: iShares.com, Company Postings

$0

$20

$0

$80

Oil Sands ETF WCS

Linear (Oil Sands ETF) Linear (WCS)