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Financial Post (Canada): Oilsands projects could crumble

Oilsands projects could crumble, top investor warns: Costs worry Murray Edwards: ‘You start wondering at what point are projects still economic’

Published: Sep 22, 2006

BANFF, ALTA. – Canada’s top energy investor is bullish, long-term, on both oil and natural gas, but is also wary that Canada’s oilsands sector is so overheated projects could crumble without sustained high oil prices.

Murray Edwards, vice-chairman of Canadian Natural Resources Ltd., said he doubts oilsands output will grow in Alberta as high as many are predicting.

“I am of the view, given the challenges we face, be they labour at hand, contractor availability, infrastructure in the Fort McMurray area or the government’s response to that, that it will be difficult for the Canadian [oilsands] sector to deliver those forecasts for growth of volumes over the next 15 years,” Mr. Edwards said yesterday.

The media shy oil baron was speaking here at the Alberta government’s annual Global Business Forum, of which the National Post is a sponsor.

The Canadian Association of Petroleum Producers has forecast that output from the oilsands, at one-million barrels a day today, could rise to between 3.5-million barrels and four-million barrels by 2020.

Mr. Edwards said costs for oilsands project construction have doubled between 2001 and 2006 and appear to be still rising. The result, he said, could spell doom for the plans of some of Canadian Natural’s rivals.

“What I’m saying is the challenges of costs make you start wondering at what point projects are still economic,” Mr. Edwards said.

High oil prices, in the midst of their biggest swoon since 2004, have let the booming sector focusing on squeezing oil from the tar sands in northeastern Alberta, get as far as it has, he said.

Mr. Edwards cited costs for Suncor Energy Ltd.’s last major expansion, the Millennium project, coming in at around US$33,000 per barrel of upgraded oil produced.

He said rough costs for the next round of projects due to be completed next year or in 2008 — Canadian Natural’s $6.8-billion Horizon phase one and the Long Lake project owned by Nexen Inc. and OPTI Canada Inc. — will be in the range of US$60,000 per barrel of upgraded oil produced. Shell Canada Ltd.’s next expansion to its oilsands project is expected to be in excess of US$100,000 per produced barrel.

Mr. Edwards said he sees oil averaging US$60 a barrel through to 2010 and US$50 to 2012. He said sustained price strength, which he believes world supply and demand fundamentals will support, will dictate who builds and who doesn’t.

“In the context of Canada and high oil prices, I would argue that if we did not have this we will not be able to complete the oilsands projects that are now under construction and some further projects. They just will not be economic.”

It’s also doubtful that without “creative” solutions from industry and government, Alberta’s construction labour force, with 20,000 workers now employed on major energy projects, can swell to a projected need of 40,000 workers by 2008.

Mr. Edwards’ largest oil industry investment, Canadian Natural Resources, is now building the first phase of a $6.8-billion mining project.

Locking in contracts for construction work at fixed prices has given Canadian Natural an advantage in building Horizon, he said.

Mr. Edwards also said he sees natural gas prices bouncing back from their current malaise and averaging between US$8 and US$9 per million British thermal units, an outlook other panel members supported, including Christopher Jablonowski, associate director at the University of Texas’s energy and earth resources graduate program.

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