In back-to-back announcements, major U.S. oil producers Exxon and Conoco said they would leave 4.65 billion barrels of oil sands from proven reserves in the ground. Removing these assets from their balance sheets is another sign that unprofitable Canadian tar sands investments are beginning to haunt the industry that so recently banked its future on them.
The production of oil from tar sands is notoriously expensive, as its energy-intensive processing puts its price point well above the $50 a barrel that conventionally produced oil currently commands. Though the price of crude is low at the moment, there’s a great deal of uncertainty regarding what it may be in the near-term, with estimates ranging from $30 to $70 U.S. Even at the high end, extracting crude from tar sands oil is unprofitable.
The write-downs by both ExxonMobil and Conoco suggest that oil sands will not be profitable for at least half a decade, if ever. Some investors have read more into the write-downs, suggesting that they are a tacit admission of climate risk, which would be reflected by increased production costs due to carbon mitigation and loss of revenue from future, cheaper energy sources.
Indeed, the specter of existing and future carbon regulations casts a long shadow across the reserves of tar sands. An article in the Wall Street Journal observes: “Once considered a safe bet, Canada’s vast deposits are emerging as among the first and most visible reserves at risk of being stranded by a combination of high costs, low prices and tough new environmental rules.” The same article notes that the Albertan and Canadian governments have enacted a carbon tax and emissions cap, respectively. It is also widely understood that the 2016 Paris agreement is likely to result in suppressed oil demand in favor of alternative fuels.
Though the write-down does not constitute a write-off, it is interesting to note that investors plainly see it that way: Since July, 2016 Exxon’s shares are down 15%.