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Financial Times: Alberta oilsands lose none of their allure

By Bernard Simon in Toronto and Ed Crooks in London

Published: October 24 2006 03:00 | Last updated: October 24 2006 03:00

The potential of Canadian oilsands has been challenged in recent months, but this has not damped Royal Dutch Shell’s enthusiasm.

Yesterday it announced plans to spend £3.6bn taking full control of Shell Canada, which has substantial oilsands operations.

“We think that unlocking Canada’s resources requires the large industrial and financial scale of a company like Royal Dutch Shell,” said Jeroen van der Veer, chief executive.

Located in three main deposits across an area the size of Florida, the Alberta oilsands are estimated to contain reserves of 179bn barrels of oil, a figure exc-eeded only by Saudi Arabia.

The sands have been exploited since the 1970s. With rising oil prices, they have risen to prominence as one of the solutions to US dependence on energy supplies from the Middle East and other unstable areas.

The problem is that costs of producing oil from the sands are high and rising fast. As the oil price has fallen by more than 20 per cent from its summer peak, the outlook for Canada’s oilsands has been clouded by fears that oil may not be expensive enough to keep the industry viable.

The oilsands, which look and feel like molasses, are found in bands 6-10 metres thick.

Extracting the oil is laborious. Two tonnes of oilsands yield just 1.25 barrels of bitumen and a barrel of crude.

Foreign groups have flocked to the oilsandsin recent years. Exxon-Mobil, Royal Dutch Shell, Chevron, ConocoPhilips, Devon Energy and France’s Total are among those with stakes in either existing or proposed projects.

Two of China’s biggest energy groups, China National Offshore Oil Corporation and Sinopec Group, have invested in small Calgary-based companies with oilsands ambitions.

The half-dozen or so existing oilsands producers turn out about 1m barrels per day. If all the projects now on the drawing board come to fruition, output could rise to almost 3m b/d by 2015.

But as investment has poured into the region, at a time of strong demand for skilled staff and equipment, costs have soared.

Dominion Bond Rating Service of Toronto concluded in a study that companies were taking a more cautious view of oilsands projects as a result of escalating labour and material costs.

The study noted that “the non-discretionary nature of oilsands capital spending, long lead times to first oil production and escalating costs in a highly competitive environment combine to create significant potential financial and execution risk for companies with major oilsands projects, should prices weaken”.

Several companies are having second thoughts about their projects.

For instance, Husky Energy, controlled by Hong Kong businessman Li Ka-shing, is reconsidering plans to build a processing plant for its project.

“Under the current economics and also the labour supply, and the cost of construction, it is very difficult and it is very challenging to maintain the building in Canada,” John Lau, Husky’s chief executive, said earlier this year.

Murray Edwards, vice-chairman of Canadian Natural Resources, which hasbig oilsands plans, argued last month that many ofthe projects now proposed would need oil above$50 a barrel to be profitable.

But different groups take different views. Integrated oil companies can take the oil they extract and refineit and sell the products, a capability that companies with only upstream operations lack. That shouldhelp make the businessviable at lower oilprices than for some competitors.

Copyright The Financial Times Limited 2006

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