Oil Sands Truth: Shut Down the Tar Sands

Weak oil and debt markets may bedevil tar sands plans

Weak oil and debt markets may bedevil oil sands plans
Mon Sep 15, 2008 2:16pm EDT
By Jeffrey Jones - Analysis

CALGARY, Alberta (Reuters) - A double whammy of tumbling crude prices and shaky credit markets could force some companies to delay multibillion-dollar Canadian oil sands projects, cutting the country's overall output forecast.

Most at risk are developments that are in the design phase but have yet to start construction. Some have already been delayed due to surging costs, a tight labor market and stricter regulatory scrutiny.

"It's starting to weigh on people's minds as to what is the break point," FirstEnergy Capital Corp analyst William Lacey said.

Crude sank nearly 5 percent to $96.60 a barrel on Monday, its lowest level in seven months, on early signs that Hurricane Ike had spared most U.S. energy infrastructure in the Gulf of Mexico and as the U.S. financial system creaked amid Lehman Brothers Holdings' (LEH.N: Quote, Profile, Research, Stock Buzz) bankruptcy.

Falling demand has pulled U.S. crude down by a third since hitting an record high above $147 a barrel in July.

The oil sands in the Canadian province of Alberta represent the largest oil deposits outside the Middle East and are seen as a key source of secure supply for the United States. Projects totaling more than $100 billion are under way or on the drawing board.

But the crude from the oil sands is far more complicated and pricey to extract than Saudi Arabia's conventional oil.

Imperial Oil's (IMO.TO: Quote, Profile, Research, Stock Buzz) C$8 billion ($7.5 billion) Kearl project and the C$14 billion Fort Hills development, operated by Petro-Canada (PCA.TO: Quote, Profile, Research, Stock Buzz), are two that could face delay, Lacey said.

But Imperial, which last month said Kearl will likely be delayed by a year to 2012, will not make a new decision based on short-term price fluctuations, spokeswoman Kim Fox said.

Petro-Canada declined to comment on the potential for the Fort Hills go-ahead decision to be pushed back, saying only that its own balance sheet is strong.


The field of financing sources for big projects is narrowing with Lehman's bankruptcy and Bank of America's (BAC.N: Quote, Profile, Research, Stock Buzz) planned takeover of Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz).

"The overall ability to take this sort of product on on the debt side has become compromised, at least in the near term," Lacey said.

Developers that are already in the construction stage of big expansions, such as Suncor Energy Inc (SU.TO: Quote, Profile, Research, Stock Buzz) and Royal Dutch Shell (RDSa.L: Quote, Profile, Research, Stock Buzz), will likely stay on track.

Suncor's Voyageur and Firebag expansions are moving ahead, and the company still forecasts output of 550,000 barrels a day, about double today's volume, by 2012, spokeswoman Shawn Davis said.

The break-even point for developing oil sands varies by project. Suncor Chief Executive Rick George has said he believes the industry requires oil at $75-$80 a barrel to keep attracting investment and moving projects forward.

This summer, the Canadian Association of Petroleum Producers tempered its oil sands output forecast after some developers pushed back plans amid rising costs and regulatory delays. It predicted 2.8 million barrels a day by 2015, down from a previous forecast of 3.4 million.

CAPP vice-president Greg Stringham said he does not foresee another immediate clawback, but did not rule out future cuts in the growth rate if prices enter a long trough.

Developers run the economics on their projects at various oil prices, and few were banking on $150 a barrel, he said.

"They still have the resources and it's still economic at these prices," Stringham said. "If it drops back substantially more, then I think people would kind of reevaluate, but they would be careful because they would be looking at 30- and 40-year projects."

($1=$1.07 Canadian)

(Editing by Peter Galloway)

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