Lower Oil Prices Threaten the Alberta Oil Sands Players

NEW YORK (TheStreet) -- If oil prices can be maintained, profits for investors can as well. If oil prices continue to fall the profitability of the whole oil patch will be under threat and Canadian oil sands will be under the greatest threat.

At $92.64 per barrel, current prices on West Texas Intermediate appear healthy. But that is the price for oil delivered to a terminal in Cushing, Okla.

The product coming out of Canada, called Western Canada Select, trades at a discount to WTI, currently at $13.50 less, bringing the actual price below $80/barrel.

Supposedly, this still gives major oil sands producers like Suncor (SU) and Cenovus Energy  (CVE)  a gross profit margin of over 79%, but that's down from over 85% at the start of the year. As oil prices decline, in other words, margins are pressured.

While oil sands are easy to find -- the biggest find is well north of Edmonton -- they are expensive to extract. The product is strip-mined, trucked to a processing plant, heated and often combined with natural gas liquids in order to produce something that can be refined like heavy crude oil.

The economics of oil sands are thus different from those of shale oil. Crude requires drilling, and fracking, but then it flows from the wellhead as the resource depletes. Oil sands are mined, then refined. The initial capital spend for oil sands is higher, the recovery time on that capital is longer, but at scale the production is more regular.

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