The Oil Sands Crisis Nobody Is Talking About

The major problem in Alberta’s oil sands that nobody is talking about.

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Yesterday evening, French energy giant Total told investors that it would be shuttering its upcoming oil sands project.

The project, dubbed Joslyn, is a joint venture between Total and a number of different oil companies. The most notable partner for Canadian investors is Suncor (TSX: SU)(NYSE: SU), which owns 36.75% of the failed project. This was just barely less than Total’s 38.25% interest.

The head of Total’s Canadian division had this to say about why the company is pulling the plug on the project: “Joslyn is facing the same challenge most of the industry world-wide [is], in the sense that costs are continuing to inflate when the oil price and specifically the netbacks for the oil sands are remaining stable at best — squeezing the margins.”

Joslyn has been plagued with problems from the start. Originally, Total planned to use wells instead of trucks and shovels to extract the bitumen. This quite literally blew up in its face when one of the company’s wells exploded.

This isn’t the first time a joint venture between Suncor and Total has ended up badly. In 2013, both companies decided to call it quits on an upgrader project in the same area called Fort Hills. Suncor’s management hasn’t quite closed the book on either of these failed projects, stating it will likely revisit each in a few years.

Of course, Suncor is still a dominant oil sands player. The company’s most recent results showed production of more than 400,000 barrels of oil per day just from the oil sands, a record high. Suncor is by far the largest producer in the region, easily outpacing other producers like Canadian Oil Sands (TSX: COS), Canadian Natural Resources (TSX: CNQ)(NYSE: CNQ), and Imperial Oil (TSX: IMO)(NYSEMKT: IMO).

The bigger issue

This news is important to investors for one main reason: It symbolizes how much of a problem cost overruns are for oil sands producers.

I’m from rural Alberta. I know many people who have spent time working up in the oil sands. At first, most are gung-ho. There’s a certain excitement about working so far away from home, and their employers ensure everything is taken care of. Huge camps not only house the workers, but also feed them and keep them entertained.

And, of course, there’s the money. Oil sands workers are paid two to three times what regular workers are paid for the same job. It’s not uncommon to see ambitious workers make more than $200,000 per year after tax. There are stories about people heading up to the oil sands as 22-year-old fresh graduates and coming back five years later as millionaires.

And yet, even after all those efforts, oil sands producers are still having problems attracting staff. Many workers go in for a few months at a time and then leave, unable to handle any additional time away from their families. Boredom is a common problem in the camps, and both drug and alcohol use are common.

Oil sands producers are stuck in a tough spot. They need to get employees up to northern Alberta, and are willing to offer a huge premium to do so. Once you factor in other fringe benefits received by staff, this becomes an almost prohibitive cost, especially for producers that have already paid a premium just to be in the region.

During the early days of the oil sands, this wasn’t such a big deal. It was so cheap to produce that increased costs were just a minor inconvenience. These days, that easy oil is mostly a thing of the past. New projects have much higher costs than previous generations, and that’s not even including staff.

Production in the oil sands used to be a slam dunk. Now, cost overruns are a major issue. Investors need to be aware of this, and realize that any sustained drop in oil prices could majorly curtail oil sands production. The days of oil sands operations being low-cost are largely over. Look for more of these projects to be suspended in the future.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stock mentioned in this article. 

More on Investing

Simple life style relaxation with Asian working business woman healthy lifestyle take it easy resting in comfort hotel or home living room having free time with peace of mind and self health balance
Stocks for Beginners

New Investors: Follow the KISS Model With These 3 TSX Stocks

These TSX stocks keep it super simple for new investors. You'll need each of these services over the next decade…

Read more »

stock research, analyze data
Dividend Stocks

RRSP Investors: 1 Cheap TSX Dividend Stock to Buy Now and Own for 35 Years

RRSP investors can still find top TSX dividend stocks to buy at discounted prices.

Read more »

A airplane sits on a runway.
Investing

Why Did Bombardier (TSX:BBD.B) Stock Surge Over 75% in a Month?

Bombardier (TSX:BBD.B) stock has surged over 75% in last 30 days after strong second-quarter earnings. Is it a buy at…

Read more »

financial freedom sign
Stocks for Beginners

Millennials: Pay Down Debt and Get Rich in Just 1 Decade

Millennials continue to have huge debt on their hands, but they can pay it off and become rich by getting…

Read more »

Cogs turning against each other
Dividend Stocks

2 of the Safest Stocks (With Dividends) to Buy in Canada Now

Here are two of the safest stocks investors in Canada can buy now.

Read more »

Money growing in soil , Business success concept.
Tech Stocks

Got $1,000? Buy These 3 Top Growth Stocks

These three Canadian growth stocks could deliver superior returns over the long run.

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

2 Top Canadian Value Stocks Worth Buying Right Now

Here's why Alimentation Couche-Tard (TSX:ATD) and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) are two top value stocks to consider right now.

Read more »

A worker wears a hard hat outside a mining operation.
Metals and Mining Stocks

Ivanhoe (TSX:IVN) Had a Record Quarter: Should You Buy the Stock Today?

Ivanhoe Mines Ltd. (TSX:IVN) delivered record profits in its Q2 2022 earnings, which should spur investors to look hard at…

Read more »