September 25, 2014 / 9:06 PM / 3 years ago

UPDATE 2-Statoil calls off 40,000 bpd Canada oil sand development

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OSLO/CALGARY, Sept 25 (Reuters) - Norwegian energy company Statoil ASA said on Thursday it will postpone development of its 40,000 barrel per day Corner oil sands project in Alberta, Canada, for at least three years, cutting about 70 jobs at its Canadian unit, because of rising costs and limited pipeline space.

The company is the first oil sands operator to defer a project as weak world oil prices cut profits and push returns in the high-cost oil sands close to the break-even point. Rising production from the region is also squeezing available pipeline space while companies await U.S. approval for the contentious Keystone XL pipeline.

”The fact that Keystone (XL) is not yet built is pressuring prices, and that makes the project more marginal,“ said Samir Kayande, director of energy research at ITG Investment Research. From our perspective, it’s a rational decision to say let’s slow down a bit.”

Corner would have been the second major development at Statoil’s Kai Kos Dehseh property in northern Alberta. The company said its existing thermal oil sands operation, the 20,000 bpd Leismer project, is not affected by the postponement.

Statoil said it decided to delay construction because inflation was pushing up the cost of labor and materials, while tight pipeline space to the U.S. market was pushing down the price of its oil.

“Costs for labour and materials have continued to rise in recent years and are working against the economics of new projects,” Staale Tungesvik, Statoil’s country manager for Canada, said in a statement. “Market access issues also play a role, including limited pipeline access, which weighs on prices for Alberta oil, squeezing margins and making it difficult for sustainable financial returns.”

Statoil is the first company in recent years to delay a thermal project in Alberta’s oil sands, the world’s third largest crude reserve. Thermal developments, which pump steam into the ground to liquefy thick bitumen deposits, are much cheaper to build than the large-scale mining projects also used in the region.

However, earlier this year Total SA suspended work at its C$11 billion ($9.9 billion) Joslyn oil sand mine as it looks for ways to cut costs at the troubled project.

While benchmark oil prices have dropped 15 percent over the past three months, Canadian crude prices have been relatively healthy throughout the summer, tightening to around $13 per barrel below U.S. benchmark crude in September, the narrowest differential in 14 months.

But with the West Texas Intermediate benchmark sliding to just above $90 per barrel earlier this month, the outright price of Canadian crude is nearing the break even cost for some oil sands projects.

Still, few of Statoil’s peers have noted that inflation is a concern, and many have turned to crude-by-rail to ship their oil to refineries. However, access to skilled labour remains an issue for oil sands operators, particularly those who do not have continuous expansion underway.

“With Statoil it’s been a while since they expanded, so starting up from a standstill is harder than if you are continually expanding,” said Michael Dunn, an analyst at FirstEnergy Capital. “Between not having contractors lined up and not being first in the queue with your suppliers, it makes it difficult.”

Statoil declined to disclose capital costs for the Corner project. (1 US dollar = 1.1094 Canadian dollar) (Reporting by Scott Haggett and Nia Williams in Calgary, Jessica Resnick-Ault in New York and Balazs Koranyi in Oslo; Editing by Susan Thomas and Andre Grenon)

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