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Further signs of stress in Canada’s oil sands

International Herald Tribune

TORONTO: Canada’s booming oil sands industry showed more signs of cooling off Monday as crude prices continued their long plummet from record summer highs.

Petro-Canada and its partners Teck Cominco Ltd. and UTS Energy Corp. postponed a decision on further investment in a $19.5 billion oil sands project in northern Alberta and shelved plans to build an upgrade refinery — becoming the latest to postpone investment decisions on a mine and the latest to ditch upgrades.

Oil majors like Royal Dutch Shell and other companies are re-examining the viability of oil sands development in an area that could hold as much as 175 billion barrels of oil. Only Saudi Arabia has more than Alberta.

Aggressive investment in projects like Petro-Canada’s Fort Hills project were fueled by $150 per-barrel crude over the summer, a price that has since been more than halved as a recession spreads across the globe.

Demand for energy has fallen away as corporations and individual consumers slash spending.

It is extraordinarily expensive to extract crude from sand and producers have begun to pull back as oil prices have tumbled.

“It’s pretty dramatic when you lose that much on the price of the commodity you’re selling,” said Steve Laut, President and Chief Operating Officer of Canadian Natural Resources Limited, which recently slashed spending on its multibillion Horizon oil sands expansion.

Laut said oil needs to be $70 a barrel for them to get a return on the capital spending on the first phase of their Horizon project, which is almost complete. Suncor spokesman Brad Bellows said they can make money on their existing mines if oil fell to $30, but they need it to be $80 for their expansion mine to viable.

Benchmark crude closed on the New York Mercantile Exchange below $56 on Monday.

Last month, Royal Dutch Shell PLC postponed a near-doubling of production for its Athabasca oil sands project north of Fort McMurray, citing the uncertain economic environment and the credit crunch. Suncor Energy Inc., Canada’s second largest oil sands operator, reduced its planned 2009 capital spending by more than a third to $4.9 billion.

Bellows said a $1 dollar change in benchmark crude has an annual impact of $55 million to Suncor’s cash flow. Suncor’s stock is trading below $20 after reaching a 52-week high of $74.28 in May. Canadian Natural Resources is below $40 after reaching $109.

With almost every oil sands company delaying expansion, Laut hopes soaring costs for the industry will be curbed. High labor and construction costs had already began to cut into profits as companies rushed to get projects online.

“Why build in a high cost environment when you’re in a moderate price world,” Laut said.

There are signs that costs are starting to come down.

Neil Camarta, Petro-Canada’s Senior Vice-President of Oil Sands, said contractors are starting to cut deals where they would not have before.

Laut said his company recently secured a contractor that was between jobs for $14 million for a project they originally estimated would cost $20 million. He said they delayed the project after initially getting offers to do it for between $40 and $75 million months ago.

Producers have also become wary as credit markets have frozen.

“You’re much more cautious on who you are dealing with on the other side, ensure they are credit worthy,” Laut said. “I suspect that’s the same with everybody across the world.”

Laut said Alberta’s oil industry has gone through boom and bust cycles before. Recessions in the early 80’s and 90’s hit the oil patch hard.

“There’s the added competition of the credit crunch which was not there the last two times,” Laut said.

Iris Evans, Alberta’s minister of finance and enterprise, said there’s no question the credit crisis and lower oil prices are hurting the province, but she’s confident oil prices will head higher. A scarcity of credit has worsened the slowdown, she said, but if oil companies stop looking for more oil, it could lead to a price shock in the future.

Evans said if President-elect Barack Obama wants to reduce America’s dependence on Middle East oil he can look to Alberta. However, Obama’s top energy adviser said earlier this year that the greenhouse gas emissions from the oil sands projects are “unacceptably high” and may run counter to Obama’s plan to shift the U.S. away from carbon-intensive fossil fuels.

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