Oil Sands Truth: Shut Down the Tar Sands

StatoilHydro scraps C$16 bln tar sands upgrader downstream

StatoilHydro scraps C$16 bln oil sands upgrader
Thu Dec 4, 2008 2:21pm EST

(Recasts with additional comment and detail, changes dateline from OSLO)

CALGARY, Alberta, Dec 4 (Reuters) - Norway's StatoilHydro (STL.OL: Quote, Profile, Research, Stock Buzz) said on Thursday it scrapped plans to build a C$16 billion ($12.6 billion) upgrader for its Canadian oil sands holdings, the latest in a string of big-ticket cancellations in the oil-rich but expensive region.

The energy company, which had previously delayed construction plans for the unit by two years, said it withdrew its application for regulatory approvals for the upgrader, a complex unit that converts tar-like bitumen stripped from the oil sands into refinery-ready synthetic crude.

Citing prohibitive costs, weak oil prices, economic turmoil and a lack of "legislative clarity," the company will go ahead with plans to produce as much as 200,000 barrels per day of bitumen from its oil sands holdings but sell it on the open market instead of turning into more valuable synthetic oil.

"In line with several other players in the Canadian oil sands industry, StatoilHydro has decided to discontinue the upgrader project at this time, but will continue to monitor the cost and price environment and reassess downstream options going forward," the company said in a statement.

Nearly every major project in the oil sands region of northern Alberta has now been delayed or deferred as oil prices fall but costs remain prohibitive as firms look to tap a small pool of skilled labor.

The region contains the biggest oil reserves outside of the Middle East, but they are technically challenging and expensive to exploit, with some analysts suggesting oil prices need to be as much as $100 per barrel for the massive projects to turn a decent profit.

"With the cost inflation we've seen it's tough to make the economics work with an upgrader in Alberta," said Chris Feltin, an analyst with Tristone Capital.

Indeed, StatoilHydro is taking the same step as Petro-Canada (PCA.TO: Quote, Profile, Research, Stock Buzz), which last month walked away from plans to build an upgrader to strip costs from its C$21 billion Fort Hills oil sands project. Instead, it too will only produce bitumen from its oil sands holdings.

Petro-Canada is mulling looking for a U.S. refiner to handle its bitumen output, a step already taken by Husky Energy Inc and EnCana Corp, which have found joint-venture partners in the United States with underutilized refinery space.

Other oil sands companies, a list that includes Nexen Inc (NXY.TO: Quote, Profile, Research, Stock Buzz), Suncor Energy Inc (SU.TO: Quote, Profile, Research, Stock Buzz) and Canadian Natural Resources Ltd (CNQ.TO: Quote, Profile, Research, Stock Buzz) have backed off or slowed upgrader expansions.

The closely held Value Creation Group, in September halted construction at its partially built C$4 billion Heartland upgrader in Strathcona County, northwest of Edmonton, near where StatoilHydro and other firms had planned to put their upgraders.

StatoilHydro last year bought 257,000 acres of oil sands leases for $2 billion in a bid to diversify away from its aging North Sea oilfields. ($1=$1.27 Canadian) (Reporting by Scott Haggett and Aaa Christine Stoltz; Editing by Frank McGurty)

© Thomson Reuters 2008 All rights reserved


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