Energy companies are cutting back development of Canadian oil sands

Nov 11, 2008 01:00 AM

Energy companies are cutting back development of Canadian oil sands, the world's biggest energy reserves outside Saudi Arabia, as crude prices plunge and processing costs become prohibitive.
Royal Dutch Shell, the world's second-largest oil company, and Calgary-based Suncor Energy and EnCana said they will reduce plans to extract bitumen, the tar-like raw material for the crude, after prices fell 65 % to $ 37.07 a barrel since July 4. The Canadian Association of Petroleum Producers reduced its forecast for spending next year by 20 % to C$ 16 bn ($ 13.6 bn).

In June, the trade group said companies would spend C$ 126 bn over the next five years on pipelines, mines and upgrading plants as record oil prices made the Canadian reserves in Alberta increasingly lucrative. The figure has now been chopped to about C$ 80 bn, Greg Stringham, a vice president at the association, said on Nov. 7.
"Because of the economic uncertainty and turmoil that's out there right now, both the availability of capital and the lower pricing, people are waiting to see how long and how deep that is going to be,'' Stringham said.

Companies can get oil from processing bitumen dug from mines or coaxed from the ground using steam. It takes two tons of oil sands to make one barrel of oil. Oil-sands projects will be profitable if crude is priced at $ 95 to $ 100 per barrel in coming decades, said Ryan Todd, an analyst for Deutsche Bank in New York. Bitumen can be tapped at existing projects for roughly $ 40 a barrel, he said.
"The oil-sands oil typically tends to be the most expensive barrel to produce out there," Todd said.

Oil demand crunched
The Cold Lake blend must go through an upgrading process, adding C$ 20 to C$ 25 to the cost of the product that goes to refineries, Stringham said. Oil prices fell as the global credit crunch that forced financial companies to report $ 688 bn in losses and write-downs since the start of 2007 caused the world economy to slow.
The cooling economy will cut global oil demand for the first time in a quarter of a century next year, Wood Mackenzie Consultants said Nov. 6. Oil demand in the US, the oil sands only export customer, will slump 830,000 bpd, or 4.3 % this year from 2007 to 19.8 mm bpd, the Energy Department predicted Oct. 7.

EnCana cited financial market uncertainty on Oct. 15 when it delayed a plan to spin off Cenovus Energy, which was formed to manage oil-sands projects in Alberta and US refineries.
Closely held Value Creation, based in Calgary, stopped work on a C$ 4 bn upgrader, which separates bitumen from sands and converts it to heavy oil, because of financing, Gerry Gabinet, director of economic development in Strathcona County Alberta where the upgrader was planned, said on Sept. 25.

EnCana, Imperial, Suncor
Oslo-based StatoilHydro, Norway's largest oil company, said August 11 that it may postpone the start of its oil-sands upgrader. Bruce March, chief executive officer for Imperial, which is 70 %-owned by ExxonMobil, said Aug. 6 the company is deciding whether to proceed with the Kearl oil sands project, citing rising costs of development.
Suncor, said on Oct. 23 it will cut back on construction at its Voyageur oil-sands project in Northern Alberta because of tumbling crude prices and will focus on another site. The same day, Petro-Canada and UTS Energy, based in Calgary said they may postpone an oil-sands processing facility near Edmonton. A week later, Shell said it will delay an investment decision on expanding its Athabasca oil-sands project because of construction costs. The company, based in The Hague, said it will press ahead with the first phase of the project.

Environmental woes
US policies that discourage fuel purchases from heavy- polluting sources are further reducing incentives to exploit oil sands. The crude creates three times more greenhouse gases than conventional wells, and a US law enacted in December bans federal agencies from buying fuels that cause more emissions than alternatives.
Oil-sands mines along the Athabasca River near Fort McMurray, Alberta, can be 80 meters (262 feet) deep and claimed almost 500 sq km (311 sq miles) of forest. They have created bitumen and clay-laden ponds with an oily sheen of grey and green hues that have killed scores of birds.

Oil sands hold the equivalent of 173 bn barrels, enough to supply the US for 24 years. Only Saudi Arabia has more crude. Producers are trying to get pipelines built that would take the oil to millions more consumers by allowing shipments to Asia and to the US Gulf Coast, home to 47 % of the nation's refining capacity, according to US Energy Department data.
A line sponsored by Enbridge to the British Columbia coast may not be built before 2014, Pat Daniel, the company's chief executive officer, said in a conference call to analysts July 31. Two conduits to Texas cosponsored by Enbridge, one with ExxonMobil and another with BP, won't be ready until 2012 at the earliest, Enbridge said in separate August statements.

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