The oil sands are increasingly seen as a critical strategic component of U.S. and global energy security. World crude oil demand is expected to advance one percent a year, from 85 million barrels a day in 2008 to 105 million barrels a day by 2030.[1]

The Canadian oil sands represent a viable supply alternative to the world’s growing demand for oil and offer significant reserve and production growth potential with little associated strategic or political risk. The location, depth and size of the oil sands deposits can be determined with a high degree of accuracy and at minimal cost compared to conventional exploration. For mining operations in particular, recovery rates approach 90 percent, which is substantially higher than conventional sources.

Investment in the oil sands also provides companies with a unique and relatively low-risk opportunity to add reportable reserves. In Canada, both in situ and mined bitumen are recognized as part of typical oil and gas public disclosure. The U.S. Securities and Exchange Commission allows for in situ and mineable bitumen reserves to be reported as proved reserves.

One of the most significant drivers of growth in the oil sands has been the reduction of exploration, development and operating costs. While such costs are gradually increasing from levels experienced during the recession, industry players are still enjoying low operating costs relative to pre-recession levels. Labour turnover has decreased dramatically, leading to productivity and efficiency gains. Oil sands service providers and equipment manufacturers have been able to rein in prices as a result of the recession and increased competition. These changes have led large developers to reissue project cost projections at significantly lower figures and with the recent upswing in oil prices, investment potential is increasing.[2] Improvements driven by technological innovation and operational experience are anticipated to amplify this trend. Some industry forecasters and observers have warned, however, that as crude prices remain high and new projects are approved, the oil sands should prepare for a potential labour crunch in 2012, particularly in the areas of engineering and construction trades.

Integrated mining and SAGD operations are estimated to be economical at US$61/bbl (WTI). Any significant escalation in material and labour costs or natural gas and diluent price increases pose a risk to this outlook. However, advancement in recovery and upgrading technologies hold the potential to improve the economics associated with oil sands operations.[3]

The Canadian oil sands also has a unique opportunity to provide substantial and long-term operating efficiencies for the U.S. refining sector, which has experienced declining margins and an under-utilization of capacity in recent years. U.S. refiners were historically able to maintain reasonable profit margins by taking advantage of the price spread between light and heavy crude oil. However, when the light-heavy crude price spread collapses as it has in recent years and there is little discount between heavy and light oil, heavy refiners are unable to realize any benefits from purchasing heavy crudes. One driver of the tightened spread is the dramatic decline in production and supply to the U.S. of heavy crude oil from Mexico and Venezuela. Provided that the necessary transportation and infrastructure is developed, additional volumes of blended bitumen from the Canadian oil sands could offset such decline and support the economic fundamentals of U.S. refineries.[4]