Royal Dutch Shell Plc .com: Canada’s oilsands rush hits the buffers

From The Financial Times
By Bernard Simon in Toronto

Published: July 10 2006 03:00 | Last updated: July 10 2006 03:00

Politicians seldom balk at a company offering their area a multi-billion dollar investment.

But the regional municipality that includes the Alberta town of Fort McMurray will tell regulators this month that its over-stretched services cannot cope with a planned C$6bn (£2.9bn) expansion of Suncor Energy’s nearby oilsands operation.

Fort McMurray is at the centre of one of north America’s most frenzied resource booms since the Klondike gold rush of 1897.

The bitumen-like deposits – estimated to contain more oil than anywhere but Saudi Arabia – have drawn oil giants and investors from around the world.

According to the Canadian Association of Petroleum Producers (CAPP), a total of C$60bn is earmarked for new extraction and processing projects over the next five years.

House prices in Fort McMurray are higher than Toronto or Vancouver. The roads and schools are struggling to keep up with a population that has doubled to 60,000 in the past decade, and is expected to hit 100,000 by 2010.

Like the municipality, the oilsands industry is discovering the downside of a boom. Excitement over the spiralling oil price has given way to frustration over shortages of labour and equipment and soaring costs. The stampede has also driven up land prices for new oilsands projects.

To make matters worse, the gap between the price of light crude oil and the heavy product yielded by the oilsands has widened from about $6 a barrel a few years ago to $17 now.

Not long ago, most projects were viable at prices of $25-$35 a barrel. Now, says Doug Leggate, analyst at Citigroup in New York, “a lot of oilsands projects don’t look particularly compelling if you look below $50”. A growing list of companies are now coming to the same conclusion. Last week, Royal Dutch Shell and its partners said they were reviewing the economics of the first phase of a planned C$13.5bn expansion of their Athabasca project.

Western Oil Sands, with a20 per cent stake, said the budget for the first phase could be 50 per cent up on last year’s C$7.2bn estimate. The project includes expansions to a mine and an upgrader that converts bitumen into heavy crude. Husky Energy, controlled by the Hong Kong billionaire Li Kashing, recently raised doubts about its plan to include an upgrader in its C$2.7bn Sunrise project.

The bottlenecks and cost pressures have prompted CAPP to include a “constrained development case” for the first time this year in its production forecast.

The association estimates that total western Canadian oil output will grow from 2.2m barrels a day in 2005 to 4.7m b/d in 2020. But if the bottlenecks continue, output would hit only 3.9m b/d.

The association hopes to ease the labour shortage with looser visa rules for temporary workers and more apprenticeship programmes. In the meantime, says Greg Stringham, a vice-president of CAPP , the shortage “is acting as a natural governor on the pace of development”.

A continued rise in oil prices would help ensure the oilsands’ profitability. But any dip would just magnify the industry’s pain.

Copyright The Financial Times Limited 2006

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