Why the tar sands could be a liability for investors

Jeff Rubin, the former chief economist at CIBC World Markets, writes in Corporate Knights about challenges now being faced in the tar sands.

1- Lack of new pipelines: "The capital investment required to ramp up oil sands production to the industry's target of five million barrels a day is staggering in scale. ...That scale of capital (an estimated $300 billion) isn't going to flow into new production without the infrastructure to move all that oil to markets and dramatically improve pricing for Alberta producers. But that infrastructure (Keystone XL and other pipelines) looks nowhere in place."

2- Depressed selling prices: "Pipeline capacity has failed to keep pace with production, creating costly transportation bottlenecks that have severely restricted market access, forcing deep price discounts from Alberta's oil producers. Western Canadian Select, the benchmark price for Alberta's heavy crude, ranks among the cheapest oils globally. It trades as much as $40 below the U.S. benchmark price, West Texas Intermediate, and at times over $50 less than the global benchmark price, Brent."

3- High cost structures: "The oil sands rank as one of the most expensive energy resources, according to a Citibank analysis, which looks at 300 of the world's largest oil and gas projects. As noted in a recent report by Carbon Tracker, estimates for break-even oil prices on new Canadian oil sands projects range from $80 to $100 per barrel..."

4- Risk of stranded assets: "According to the International Energy Agency, two-thirds of the world's hydrocarbon reserves must stay in the ground in order to limit the rise in average global temperature to the 2-degree-Celsius threshold that climate scientists warn we must not cross. ...Alberta's oil sands seem precisely the kind of stranded energy assets that the energy agency says we must leave in the ground."

Given these four factors, Rubin highlights, "What was once seen as the nation's most important economic asset looks today more like a liability."