Supply Costs - Development Costs

Oil field development costs have grown significantly in Canada 1997 to 2001 due to development of the oil sands. Oil sands projects, particularly those involving upgrading facilities, are very capital intensive and project economics are extremely sensitive to capital costs. Continued escalation in raw material and labour costs will have a material impact on supply costs and project economics.

Capital costs have risen dramatically due to higher prices for steel, cement and equipment. The rising pace of development has also led to a shortage of skilled tradespersons and a reduction in the overall productivity of labour. These cost escalations and the challenge in attracting skilled labour are being felt all across the world, but are particularly severe in the oil sands region because of its relatively remote location, the high pace of development, and the scope and complexity of the projects being undertaken.

The rise in energy prices has been the most dominant factor influencing project economics and the oil sands development drive. Higher oil prices have boosted revenues; however, operating costs have also increased significantly with the rise in electricity and natural gas prices. The latter is of particular importance with an estimated 1 Mcf required to produce each barrel of bitumen. For in situ producers, the availability and price of diluent for blending has become a more pressing issue, as has the market value of heavy versus light crude oil (the differential) in traditional markets.

Lower production costs have been an important factor driving investment. However, in 1996, the Federal and Alberta governments established generic oil sands fiscal terms to make oil sands investment more competitive with oil developments elsewhere in the world. Investment dollars for oil sands projects compete with projects in areas like the U.S. Gulf of Mexico or the west coast of Africa. Governments’ vision to develop a royalty and tax regime that provides long term fiscal certainty is a key factor that supports the current oil sands growth forecasts.