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Canadian oil-sand mines stuck as crude price plummets

January 5, 2009

Canada’s once booming oil sands industry is cooling fast as the plunging oil price undermines investment. More than US$60 billion (£41 billion) worth of projects to extract oil from the bitumen-rich sands of northern Alberta have been delayed in the past three months, according to a study of industry figures by The Times.

A string of companies, including Royal Dutch Shell, Petro-Canada and SunCor, have been among those that have frozen multibillion dollar projects – in some cases indefinitely.

As much as 175 billion barrels of oil are contained in the oil-rich sands of the Athabasca region – second only to Saudi Arabia in a ranking of different countries’ proven oil reserves. But the process of extracting crude from sand, either by mining or injecting steam to recover it in situ, is both environmentally controversial, requiring the use of huge amounts of energy and water, and expensive.

The cost of production can be as high as $70 a barrel compared with $5 a barrel for some of the largest onshore oilfields in the Middle-East.

Last year, bolstered by soaring crude prices, which rose as high as $147 per barrel in July, investment poured into projects such as Petro-Canada’s Fort Hills development.

But some companies have paused projects as the recession saps global energy demand, driving oil prices down by more than $100. On Friday, US crude for delivery next month was trading around $41 a barrel.

Annette Hester, a Calgary-based energy economist at the Centre for International Governance Innovation and a leading independent expert on the industry, said a number of factors had contributed to the slowdown, including high costs and a less attractive royalty regime introduced last year by Alberta’s state government. The global credit crunch has also affected the ability of some companies to raise finance for oil sands projects. “We are absolutely seeing a slowdown in new projects although existing projects are continuing,” she said.

Connacher Oil and Gas of Calgary announced last month that it was suspending one of its projects, the Algar oil sands facility near Fort McMurray. The group cited “the rapid and recent deterioration” in oil prices.

Shell, the Anglo-Dutch oil group, said in October that it was delaying a second expansion of its oil sands project, a decision that independent experts said would affect about $11 billion of investment.

The development, which is located east of Edmonton in the Fort Saskatchewan area, involves the construction of pipelines, extraction plants and an enlarged upgrader which turns viscous bitumen into synthetic crude oil.

A spokesman for Shell said that the group remained committed to the industry and is continuing to invest in construction of facilities that will allow it to produce 250,000 barrels of crude a day by 2010. He said the secondary expansion had been delayed because of high costs and an unfavourable economic environment.

Petro-Canada has also deferred construction of an upgrader for its $17 billion Fort Hills project. Other projects that have been affected include SunCor’s $17 billion expansion of its Voyageur oil sands upgrader unit. The expansion is on hold for a year.

Ms Hester said there was also a growing wariness within the industry about the position Barack Obama, the US President-elect, will take on crude oil produced from oil sands and the possibility of more restrictive environmental legislation. She said some companies were exploring the possibility of shifting some of their processing facilities inside the US in order to make a stronger case defending the industry.

Environmentalists have welcomed the delays affecting the industry. A spokeswoman for the WWF said that there were growing questions about long-term viability of oil sands.

“Carbon-intensive businesses do not look suited to a government which is serious about tackling climate change. A high carbon price under a cap and trade system will have a more significant effect with low oil prices,” she said.

Shifting sands

About 175 billion barrels of oil are contained in Canada’s oil sands

The oil sands are located in three major areas beneath 140,000 square kilometres of northeastern Alberta

The first oil sands mining project began in 1967

In 2007, Alberta produced about 1.8million barrels of crude per day from oil sands, 75 per cent of which was exported to the US

The industry has been widely criticised by environmentalists for its use of large amounts of water and energy and the destruction of huge tracts of land.

Times Article

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