[R-G] Canada's oilsands bear the burden

[Anthony Fenton]

2007 Global Upstream Performance Review:

http://www.ihs.com/News/Press-Releases/2007/HeroldHarrisonStudy.htm


Copyright 2007 The Calgary Herald, a division of Canwest MediaWorks  
Publication Inc.
All Rights Reserved
The Calgary Herald (Alberta)

August 30, 2007 Thursday
Final Edition

SECTION: CALGARY BUSINESS; Deborah Yedlin; Pg. E1

LENGTH: 799 words

HEADLINE: Canada's oilsands bear the burden

BYLINE: Deborah Yedlin, Calgary Herald

BODY:


Anyone sounding the warning bells about oil prices crashing to earth  
in the wake of the ongoing liquidity crunch would be well advised to  
look at a joint study released Wednesday by energy research company  
John S. Herold Inc. and global corporate advisory firm Harrison  
Lovegrove & Co.

The study shows that in 2006, the global energy sector spent a record  
amount of money in the quest to replace production, with less than  
stellar results.

In round numbers, the industry parted with $401 billion US to  
explore, develop and acquire -- but only succeeded in boosting  
reserves by a meagre two per cent. For the sake of context, $122  
billion was spent in 2002 and the cost to stay even in terms of  
replacing this year's production is estimated at $280 billion.

The biggest chunk of expenditures came from acquisitions, of which  
North American players figured prominently. This one piece of  
information clearly shows the challenges to find and develop new  
resources -- the options increasingly coming down to mergers and  
acquisitions to show growth in reserves and production.

The good news from a Canadian perspective is that without the  
Canadian oilsands companies booking the majority of the 1.9 billion  
barrels added, about one per cent, the number would have been  
significantly less.

And lest anyone think this was a one-time thing, it's not. Global oil  
reserves would have dropped 2.1 per cent in the past two years if not  
for the 6.4-billion-barrel increase in Canada, driven by the  
oilsands; the gain in heavy oil and bitumen reserves since 2002 is  
roughly equal to the change in total oil reserves and global oil.

"The oilsands have been shouldering the burden in terms of growing  
global oil reserves," said Rod Schmidt, managing director with  
Harrison Lovegrove in Washington, D.C.

No wonder oil was trading over $73 US per barrel Wednesday on news  
from the U.S. Department of Energy that oil stockpiles were down 3.5  
million barrels instead of the 800,000 barrels that was predicted.

Also contributing to the price rise was the drop in gasoline  
inventories, which fell 3.6 million barrels instead of the forecast  
1.8 million barrels. That means the U.S. has enough gasoline for 20  
days -- the lowest on record.

The other regions contributing to the increase in reserves were the  
U.S. and Asia-Pacific -- both in the context of natural gas reserves.  
Take it one step further and natural gas in the U.S. is increasingly  
confined to the unconventional sources -- primarily shale gas and  
tight gas. If anything, the study underpins the trend that  
conventional production in North America, for both oil and natural  
gas, has peaked.

But the study shied away from discussing the notion of peak oil.

Instead, it suggested that the current environment in terms of costs,  
production and reserves is being driven by the fact that companies  
are opportunity-constrained because they don't have full access to  
all the potential basins in the world.

If places like Russia, Venezuela, Iran and Iraq opened their doors to  
all players, the supply side of the equation would change  
exponentially. As this is not the case, the result is what we have  
today: A tough environment for companies to find growth opportunities  
around the world because of geopolitical issues.

This means they are relegated either to the old basins, to the  
challenging, unconventional resource plays that are expensive or to  
handing over a bigger share of their revenues to governments wanting  
to increase their take. The study notes that almost 37 per cent of  
gross revenues go to government coffers these days, up from 27 per  
cent four years ago and even then, that probably underestimates the  
total cost.

There were other eyebrow raising numbers included in the study.

For the first time since 1999, the industry spent more than its total  
cash flow on exploration, development and acquisitions opportunities,  
with Canada and the U.S. taking the largest share of expenditures.  
Equally interesting was that even though the average realized price  
per barrel of oil equivalent was $43.62 US per barrel, or 16 per cent  
higher than 2005, a 31 per cent rise in the cost to produce the  
reserves accounted for one-third of the increase in higher prices.  
This means margins were squeezed and caused profits to come in 17 per  
cent lower than the year before.

The study warns that if margins continue to get thinner, the amount  
of money available to replace reserves will dwindle. That, of course,  
has the potential to drive prices even higher. Some weeks ago there  
was talk of oil hitting $100 US per barrel. This week, a few  
observers were suggesting it could double to $200 per barrel if the  
current political uncertainty in places like Iran and Nigeria  
escalate into something more.

The sky is falling on oil?? Highly unlikely.

dyedlin at theherald.canwest.com