Oil-Sands Spending to Fall 20% on Shell, Suncor, Encana Delays

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 Plc, the world's second-largest oil company, and Calgary-based Suncor Energy Inc. and Encana Corp. said they will reduce plans to extract bitumen, the tar-like raw material for the crude, after prices fell 65 percent to $37.07 a barrel since July 4. The Canadian Association of Petroleum Producers reduced its forecast for spending next year by 20 percent to C$16 billion ($13.6 billion).

In June, the trade group said companies would spend C$126 billion 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 billion, Greg Stringham, a vice president at the association, said in a Nov. 7 interview.

"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.

Suncor, which peaked May 20 at C$72.37, fell 63 percent since then and closed at C$27.01 yesterday on the Toronto Stock Exchange. Petro-Canada has declined 56 percent to C$26.30 from C$60.00 on May 22. Imperial Oil Ltd., Canada's largest oil company, and Encana losses track roughly with the S&P 500 Index, which has fallen 35 percent since May 20.

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.

`Most Expensive Barrel'

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 AG 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.

Crude on the New York Mercantile Exchange dropped 58 percent to $62.41 a barrel on Nov. 10 since it reached a record $147.27 on July 11.

Fuel from oil sands lost value at a faster pace than crude because of higher processing costs. Cold Lake, a bitumen blend, sold at a 41 percent discount to benchmark West Texas Intermediate crude on Nov. 10, compared with a gap of 11 percent on Aug. 21.

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 billion in losses and writedowns 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 Ltd. said Nov. 6. Oil demand in the U.S., the oil sands only export customer, will slump 830,000 barrels per day, or 4.3 percent this year from 2007 to 19.8 million barrels per day, 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 U.S. refineries.

Closely held Value Creation Inc., based in Calgary, stopped work on a C$4 billion 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 in a telephone interview Sept. 25. The company did not respond to phone calls seeking comment.

Source: Bloomberg