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Financial Post: Global giants may soon rule oilsands

Costs rise 55%: report
Jon Harding,
Published: Wednesday, March 07, 2007

CALGARY – The trend of soaring capital costs in Alberta’s oilsands will continue and could squeeze out smaller players, turning the industry into an exclusive club of fully integrated global giants, international energy consultancy Wood Mackenzie said yesterday.

In a report that was immediately criticized as off the mark by some of the sector’s smaller players, the U.K.-based Wood Mackenzie said oilsands costs have risen 55% since 2005.

It warned that costs will continue their “upward journey” assuming companies press ahead with large-scale plans and drive the inflation that has gripped the sector for the past two years.

“The pace at which this enormous resource is developing could ultimately increase to a point where smaller companies are excluded and only fully integrated global companies are in a strong enough position to take on the costs and risks of developing these reserves,” says the report, entitled The Cost of Playing in the Oil Sands.

The “hyper-inflation environment” in Alberta is largely due to labour shortages, increasing material costs and, to a lesser degree, skyrocketing prices to acquire oilsands leases, the average cost of which have increased 434% since 2004, the report says.

It does not mention the potential impact of Ottawa’s green agenda, or government policy shifts that could wind up adding costs to oilsands developers’ bottom lines.

One project cited that could feed the inflation and ultimately compel consolidation among smaller oilsands firms is Shell Canada Ltd.’s recently unveiled plan to forge ahead over the next dozen or so years toward boosting output at the Athabasca Oil Sands Project to 770,000 barrels a day through three expansion phases.

Wood Mackenzie said in the past 12 months alone, the capital costs required to reach an oilsands project’s peak point of production rose 32% for a typical mining project and 26% for an in-situ, or thermal-recovery, project. Report author Conor Bint, a Canadian from Calgary and Wood Mackenzie’s Edinburgh-based upstream research analyst, said among the 43 projects his firm is tracking, mining projects have an average break-even oil price of US$28.

He said the rates of return are more favourable for the less capital-intensive thermal projects, averaging about 22% with a break-even oil price of US$28 a barrel.

While those sound like reasonable returns, they actually pale next to conventional oil projects in Canada or elsewhere, Mr. Bint said in an interview.

The report says with oil at US$50 a barrel, all the commercial developments Wood Mackenzie modelled will be profitable with rates of return greater than 10%.
“Although still marginal, the projects have long resource lives and remain attractive investments,” the report says, adding its estimates show Suncor Energy Inc.’s mining development has the lowest break-even price but also the lowest rate of return thanks to its small revenue in the early days of production when oil prices were much lower.

Scott Ranson, general manager of public affairs at Synenco Energy Inc., said there is no question costs are rising and that larger players have more options at their disposal to help manage the challenge.

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