Here a paper written by one of our members exploring the viability of Alberta oilsands impacting the overall world market price for crude from 2005.

Abstract: This paper will investigate the impact production of the Alberta oilsands reserves may have on the world oil market and how the OPEC cartel could respond to this new supply. The primary market used in examples is the relationship between the United States, Alberta, and OPEC. The effect lost world oil market share and subsequent OPEC responses will also be investigated. Crude oil is the only resource under consideration within this paper despite other resources available within the oilsands resource.

Analysing the potential impact the Alberta’s oilsands reserves could have on the world oil market requires one to clarify what volumes regarding available reserves and output will be used in discussion. Determining the size or clarifying which data sets are used is largely dependant on a variety of variables and measures a particular firm or institution incorporates.

According to The Alberta Energy and Utilities Board (EUB), current oilsands reserves are estimated to contain approximately 174 billion barrels oil (as of 2003). 174 billion barrels of available reserves producible at current technology. Many advocates of the oilsands production and expansion, that is producers and Alberta politicians alike, are eager to divulge a resource value closer to 315 billion barrels.

This ultimate recoverable volume is attractive to proponents of oilsands production because of its size. The ultimate recoverable estimate is greater than the current conventional proved oil reserve estimate for Saudi Arabia, OPEC’s biggest member and producer. However, using the ultimate resource figure when describing the current potential for Alberta oilsands output is presumptuous. The value cannot be supported with current technology and thus should not be considered when determining the size of the resource. The more accurate estimate suggests Alberta holds the world’s second largest reserve of oil deposits at 174 billion barrels. Although the ultimate potential of the oilsands is comforting to Albertans, due to their dependency on the energy sector, the value of current recoverable reserves is nonetheless staggering when compared to the remaining conventional reserves within Alberta and abroad as well.

This is the primary reason why the oilsands have generated significant interest, the volume of reserves will meet Alberta’s appetite for oil revenues and America’s appetite for oil consumption for years to come. Thus the question is: are the reserves large enough to meet and impact the world oil market prices and can this supply reduce America’s need for Middle East oil? Without a doubt the oilsands deposits are large enough to support an increase in production and consequently an increase in exports to the world market (the closest market being America). Will producers be able increase oilsands extraction technology to make it less costly to lift and more efficient, thus increasing output? One would assume they can, the energy industry increases their own longevity by repeatedly devising new and efficient techniques and protocols. Although this theory sounds simple, it is missing an integral component that can ultimately dictate whether oilsands production will hit boom or bust, and that is the dependence on world market price. The likes of Shell, Suncor, Nexen, to name a few, are continually expanding their operations to accommodate the growing world demand, and to exploit the resource, however, these firms will only expand if it remains profitable for them. Oilsands production is very capital intensive and requires ideal market conditions to render them appealing to investors. Regardless of world supply depletions, increases in world demand, or size of Alberta’s reserves, market price is what will plot the future of oilsands development and production. Thus the only item holding the emergence of oilsands ‘dominance’ on the world market is the level of output and dependence on market price. What do we experience today? (2006) Record crude oil prices with no indications they will relent. Supply is tight and OPEC is happy with this state. If Alberta and oilsands are to have any substantial impact on the world stage they must increase technology (reducing costs) and production (increasing volume).
Three essential items are required for successful integration of oilsands products into the world market. Firstly, oilsands producers need to increase production technology to reduce lifting costs. Attributed to costs is the ability for producers to locate dedicated and cost efficient transportation methods to place their product on the world market. The second item will hinge upon the world price of oil. Currently the oilsands developers are price takers. It is imperative that a costly venture such as oilsands production continue to exploit a high world oil market price to justify their production and expansion. Current market conditions, the high market price for crude, make for an ideal setting for expansion and development. Expanding technology will reduce costs of production thereby shielding producers from lower market prices and increasing their overall productivity. A strong and predictable price will provide the foundation for continual expansion of oilsands production, and thus building Alberta’s position in the world market. The last item depends on both technology and price-that is the quantity of output. Currently, Alberta produces approximately 352 million barrels of crude oil a year from the bitumen reserves. The current production volume is not enough to have even a minimal impact on OPEC’s world market share. If the entire volume from 2003 output was exported to the United States market, this would account for less than 30 days worth of their yearly imports. Although this may be a large quantity, the potential is greater still.

This article is continued in Part 2 next week.

[tags]opec, oil, oil price, oilsands, oil sands, bitumen[/tags]