Analysis: Falling oil raises fears for oil sands development

Mon Jun 4, 2012 5:55pm EDT
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By Jeffrey Jones

CALGARY, Alberta (Reuters) - Falling oil prices are rekindling fears that Canada's oil sands industry could start to put some projects on the back burner, like it did in the last financial crisis, to cope with weakening returns and stubbornly high costs.

So far, development in Northern Alberta has stayed on pace as West Texas Intermediate crude sank to current levels around $84 a barrel, from more than $104 six weeks ago, and no analysts are calling for large volumes to get shut in.

Still, some marginal developments without money committed may be shelved if world oil prices remain low amid a worsening global economy while an oversupply of Canadian crude floods into the U.S. Midwest market, spelling ever-deeper discounts.

"Oil sands projects display some of the highest break-evens of all global upstream projects. The potential for wide and volatile differentials could result in operators delaying or cancelling unsanctioned projects," Wood Mackenzie Ltd said in a report on Monday.

"Pure-play oil sands companies without hedges in place, such as a U.S. downstream position, are the most exposed."

In 2008 and 2009, more than $80 billion worth of developments were shelved, rejigged or canceled outright when oil sank below $40 a barrel and corporate credit dried up. But since then investments have roared back.

The industry currently predicts oil sands output could hit 3 million barrels a day by 2020, up from the current 1.6 million, and at least one analyst believes that to be a conservative figure.

Some projects say production could bump up against export capacity as early as 2016, a major factor in the industry's and Ottawa's push to advance TransCanada Corp's (TRP.TO: Quote) Keystone XL pipeline to Texas and Enbridge Inc's (ENB.TO: Quote) Northern Gateway pipeline to the Pacific Coast against protests from environmental groups and some native communities.   Continued...