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Oil Sands Rising as BP Spill Casts Palls Over Future of Deepwater Drilling

Bloomberg

By Irene Shen and Matt Walcoff – Jul 20, 2010

Suncor Energy Inc. and Canadian Natural Resources Ltd., two of the largest oil-sands producers, rank among the biggest winners as a U.S. halt on new Gulf of Mexico drilling leads investors to alternative crude sources.

Canadian energy stocks are drawing the highest premium since 2005. Standard & Poor’s/TSX Energy Index of Canadian stocks now trades for 32.1 times reported profit from the past year, more than twice as much as fuel producers in the MSCI World Index, the benchmark for equities in 24 developed markets.

Oil-sands miners, which strip crude from tar-soaked earth, have been reviled by environmental groups such as the Pembina Institute over toxic waste and carbon emissions from oil processing that contribute to global warming. The projects now don’t look as harmful compared with deepwater drilling, after BP Plc’s spill tarred about 550 miles of shoreline from Texas to Florida, said Don Coxe, a strategy adviser to Bank of Montreal’s BMO Capital Markets unit.

“It’s going to be many months before people figure that offshore drilling in the U.S. is going to be something you can take a bet on,” Coxe said. “For those looking for resources, the oil sands are the best place to go in North America.”

After the Deepwater Horizon rig blew up in the Gulf in April, the Obama administration imposed an initial moratorium on new deepwater drilling, citing safety concerns.

New Moratorium

That ban was rejected by a federal judge. Interior Secretary Kenneth Salazar announced a new one July 12 which identifies at-risk wells based on drilling configurations and technologies instead of water depth.

Oil output from the Gulf region may fall by as much as 300,000 barrels a day in the next five years, the International Energy Agency has forecast.

As a hedge against tighter oil supplies, investors will pump more money into companies that extract crude from Alberta’s sands, said Adam Waterous, global head of investment banking at Scotia Capital Inc., the investment-banking arm of Toronto-based Bank of Nova Scotia.

Total SA, Europe’s third-biggest oil producer, said on July 7 it will buy UTS Energy Corp. for C$1.5 billion ($1.4 billion) to boost its output from Canadian oil sands. The price is 81 percent more than what Total had declared as its final offer for the company in an April 2009 bid.

Suncor, TransCanada

Investors are raising valuations for oil-sands companies, while those for the largest U.S. oil companies decline. The higher price-to-earnings ratio indicates investors are willing to pay a premium for the oil-sands production.

Suncor Energy, Canada’s largest energy company, has had a 7.7 percent increase in its forward price-earnings ratio, even as oil slid 3.7 percent this year. The ratio for TransCanada Corp., which is building a pipeline to deliver oil-sands fuel to southern U.S. refineries, climbed 3.2 percent.

In contrast, the price-to-earnings ratio of Exxon Mobil Corp., the world’s largest energy company by market value, dropped 4.8 percent, and that of Chevron Corp., the MSCI World/Energy Index’s No. 2 company by weighting, declined 10 percent.

Alberta’s oil sands contain the biggest crude reserves outside of Saudi Arabia, according to Canadian government estimates. Bitumen, the semi-solid crude beneath northeastern Alberta’s boreal forest, will be the base of the largest single source of U.S. oil imports this year, according to industry consulting group, IHS CERA.

Production Rising

By 2030, oil sands may account for as much as 36 percent of U.S. oil and refined-product imports, up from 8 percent in 2009, the group has said.

The province’s bitumen output will more than double to 3.2 million barrels a day for a total 1.2 billion barrels a year by 2019, according to the Energy Resources Conservation Board’s 2009 annual report.

Opposition to development has come mainly from environmental organizations including the Sierra Club and Greenpeace.

An Alberta judge ruled last month that Syncrude Canada Ltd., the largest oil-sands miner, was responsible when 1,606 ducks died in 2008 after landing on one of the company’s toxic- waste ponds. By comparison, the Exxon Valdez disaster in 1989 killed 100,000 to 300,000 birds, according to a 1990 study by Alaska biologists.

Keystone XL Pipeline

In a July 2 letter to the Washington Post published in a C$58,000 advertisement, Alberta Premier Ed Stelmach defended the oil sands against accusations of environmental damage. The ad came after 50 U.S. congressmen sought a hold on the expansion of the Keystone XL pipeline, TransCanada’s conduit between the oil sands and refineries on the U.S. Gulf Coast.

The increase in interest in oil-sands production after the Gulf spill isn’t necessarily good news for the industry, said Dave Collyer, president of the Canadian Association of Petroleum Producers. The new burst of investment may bring more environmental scrutiny, said Collyer, former president of Royal Dutch Shell Plc’s Canadian unit.

“We need to deal with broader issues of public confidence,” he said.

To contact the reporters on this story: Irene Shen in Calgary at [email protected]; Matt Walcoff in Toronto at [email protected].

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