92% of future oil sands production will only viable if oil prices are $95 per barrel. However, prices stand at only $85, so producers are losing money for every barrel of oil they sell.
One of the most destructive forms of oil production is financially nonsensical and faces total collapse, according to a new report by the Carbon Tracker Initiative (CTI), Oil Sands: Fact sheets.
The report suggests that that investors are being misled about the economic viability of oil sands production, which is doing irreparable damage to the pristine boreal forests of northwestern Canada.
CTI, an environmentally-aware financial analysis company, argues that future oil sands projects, besides being environmentally disastrous, are also financially catastrophic and are leading their investors towards serious loss.
Despite the recent dramatic fall in oil prices, the companies have failed to factor in the risk of further falls in prices. Oil sands projects, with their high productions costs, are especially vulnerable as oil price declines can easily wipe out all their profitability.
"The cost pressures facing the oil industry show few signs of abating", states the report - yet oil companies simply refuse to recognize them.
An industry at odds with the facts
London-based CTI have applied their own financial model to the expensive production oil sands process using data from Rystad, a Norwegian energy-analysis firm.
The results indicate that fossil fuel companies are misleading potential investors by understating the risks of lower oil prices, higher environment clean up charges and new greenhouse gas regulations.
CTI calculate that 92% of future oil sands production will only viable if oil prices are $95 per barrel. However, prices stand at only $85, so producers are losing money for every barrel of oil they sell - unless they are cushioned by existing higher-priced contracts, which will sooner or later expire.
The recent decline has thus "changed the whole dynamic for regions of marginal production - most noticeably the oil sands of Alberta" - and investors are facing significant losses unless oil prices pick up rapidly.
An existential threat?
Remakably, the companies have failed to answer this 'existential' problem that could close down the entire tar sands operation. That may be because 20 companies have committed, collectively, $246 billion to oil sands.
Of these, the greatest capital expenditure has come from Canadian Natural Resources (CNRL), whose $31.6 billion investments were made on financial predictions that now seem wildly optimistic. Such financial predictions could result in "wasted capital and stranded assets" on a huge scale.
The same applies to runners up Suncor Energy with $22.2 billion invested in tar sands, Athabasca Oil Sands Corporation with $21.7 billion, and Shell with $21.4 billion.
Meanwhile - like the cartoon character running in mid-air after overstepping the edge of a plunging cliff - financial markets remain out of step with reality of future oil extraction.
Perhaps investors are hoping that prices will soon bounce back up again and return tar sands investments to profitabilty. But if they don't the entire industry faces collapse - and investors will have to write off around a quarter trillion dollars, a sum comparable to losses on the Lehman Brothers collapse.
But they can't say they weren't warned. CTI chairman Jeremy Leggett wrote in the Guardian in 2011: "Oil, gas and coal industries have been rushing to list shares on stock exchanges in recent years, using investment prospectuses that never mention climate change [and] post their reserves as assets assuming zero risk".
The tragic cost of their miscalculation
Northern Alberta's tar sands constitute the world's third largest oil reserve after Saudi Arabia and Venezuela, 95% of it in the form of bitumen-soaked sand buried under native 'taiga' forest.
The oil's extraction has already resulted in a one of the "bleakest scenes of man-made destruction", as The Economist wrote in 2014, deforesting thousands of square kilometres and creating vast, toxic slurry puddles as recently illustrated in National Geographic.
Despite the recent loss of profitability of tar sands exploitation, Government and industry are planning to expand the industry, and produce as much as 25 billion barrels of oil in the period to 2050. However 92% of this will be viable only at an oil price of $95 or more.
The report: Oil Sands: Fact sheets is by the Carbon Tracker Initiative (CTI).
Gregory McGann is a writer, journalist and scholar at Exeter College Oxford.