By Scott Haggett
CALGARY, Alberta, Sept 19 (Reuters) - Canada's oil sandsindustry is shrugging off declining world oil prices as some ofthe world's highest-cost producers find a cushion in strongdemand and a weakened domestic currency.
The companies that mine and drill the world's third-largestcrude reserve in northern Alberta are sanguine about the latestround of falling oil prices, arguing that costs have dropped andthat domestic prices are firm even as world prices falter.
"There's an impression that the oil sands is the marginalbarrel," said Brian Ferguson, chief executive of Cenovus EnergyInc, one of Canada's largest oil sands developers."Yes, some of the projects are more marginal but the majority ofthe big producing projects, the majority of the resource, isvery economic."
The price of West Texas Intermediate (WTI) oil, the NorthAmerican benchmark, has dropped 13 percent since mid-June tojust over $92 per barrel, while Brent oil, the internationalstandard, is down 15 percent to around $98 per barrel.
Canadian producers have avoided much of the pain wrought bythose price drops. The price for Western Canada Select, theheavy crude from the oil sands, is trading for about $14 perbarrel under WTI, compared with $21 under the benchmark inmid-June, while the Canadian dollar has weakened from aboutC$1.08 to the U.S. dollar to around C$1.10 currently.
Oil sands producers' costs are in weak Canadian dollars,while their revenue is generally in robust greenbacks.
Receiving $78 dollars per barrel for their heavy oil leavesa comfortable profit for most, but not all, producers, with thesmallest projects usually bearing the highest costs. The AlbertaEnergy Regulator says thermal projects, where steam is pumpedinto the ground to liquefy tarry bitumen deposits, can breakeven within a WTI price range of between $55 and $85 per barrel.
Mining projects, which are on a much larger scale but mostlyproduce more valuable synthetic crudes, need North Americanprices of $75 to $105 per barrel, the regulator estimated.
Still, Lorraine Mitchelmore, president of Royal Dutch ShellPlc's Canadian unit, which operates a mining andupgrading project in the Alberta oil sands, said last month thatBrent below $70 (per barrel) would be "a challenge", but atcurrent prices she sees no risks to production.
To be sure, low prices may persuade oil sands operators tolower capital spending in the near term and defer big projectsif they see weakness over the long term, but most will continueto produce oil to cover as much of their costs as possible, evenif it means racking up a loss.
"If there's a drop in oil prices next year it will havevirtually no impact on oil sands production," said Michael Dunn,an analyst at FirstEnergy Capital. "It's a fixed-cost game. Inthe U.S. $80 (per barrel) versus $90 will make a largedifference in the number of shale oil wells drilled." (Reporting by Scott Haggett; Editing by Peter Galloway)
