October 23, 2008 / 4:42 PM / in 9 years

Canada oil sands plans get revamped as oil falls

CALGARY, Alberta (Reuters) - Companies developing Canada’s oil sands, one of the world’s largest deposits of crude oil, said on Thursday they aim to cut spending on multibillion-dollar projects in response to tumbling oil prices and the financial meltdown.

Petro-Canada, operator of the proposed C$21 billion-plus ($17 billion-plus) Fort Hills project, said it may first sell raw bitumen from its Alberta mine and defer the upgrading plant that turns the crude into light synthetic oil. Its shares jumped 5 percent.

Suncor Energy Inc said it will slow near-term spending on its C$20.6 billion expansion, delaying completion of its own new upgrader by a year. It also cut its 2009 budget by a third.

The cuts are the latest to hit Canada’s energy sector, where fortunes have soured quickly as oil demand has dwindled, more than halving prices in a three-month span to current levels below $70 a barrel.

“I think everybody knew that the wheels were going to come off to some degree, but the collapse of the credit markets has just accelerated all of this,” Dundee Securities analyst Menno Hulshof said.

“I don’t think that anybody in a million years thought oil prices were going to come off as hard as they did and that the larger players were going to have to make these difficult decisions.”

Some analysts have said new oil sands projects require oil prices above $80 to earn an acceptable return.

Petro-Canada reported its third-quarter net earnings jumped 61 percent to C$1.3 billion, or C$2.58 a share, meeting expectations as oil prices hit a record in the summer before the financial meltdown began.

But investors were watching more closely for decisions on Fort Hills after Petro-Canada and its partners said in September that the estimated cost had soared by 50 percent.

DECISION LOOMS

The project is a major part of the company’s long-term strategy, which also includes other oil sands developments and a newly completed C$2.5 billion retooling of its Edmonton refinery to run oil sands crude exclusively.

“We haven’t made the decision, but we are looking at committing initially to the mine and deferring the decision on the upgrader,” Petro-Canada Chief Executive Ron Brenneman told analysts. “What we’re doing over the course of the next month or six weeks as we put our business plan together is also looking at what sort of definitive cost we can expect for the mine itself.”

He did not have an estimate on how much money such a move might save, but its partner, UTS Energy Corp, said the figure could be as high as C$10 billion.

Brenneman said it appeared the economic slowdown was serving to reduce prices for key materials such as steel, which would play in Fort Hills’ favor.

The partners, which also include Teck Cominco Ltd, do not know how long they might defer the upgrader, and much would depend on the market for raw bitumen, which trades a varying discount to light crude, he said.

The mine’s first phase would have two 80,000 barrel a day production trains and initial output is expected in 2011.

‘WE‘RE NOT MOTHBALLING IT’

Suncor is modifying its expansion, called Voyageur, after investors began to question its ability to fund plans to boost output by nearly 60 percent to 550,000 barrels a day

“Given the current situation in the financial markets what we are doing is announcing a change in how we execute this project,” Chief Executive Rick George said in a conference call. “We are not mothballing it, we’re not stopping it ... We believe this will give us reduced risk on a go-forward basis and increased flexibility.”

The move would be similar to the Fort Hills deferral in that Suncor would increase production while holding back on its capacity to process the raw bitumen.

Still, George said Voyageur’s estimated costs had not jumped anywhere near the extent of those at Fort Hills.

Suncor also said it will spend C$6 billion on all its operations next year, down from a previous estimate of about C$9 billion to C$10 billion.

Its shares fell 26 Canadian cents to C$26.20 on the Toronto Stock Exchange, marking a drop of 57 percent since the end of the second quarter.

Petro-Canada rose C$2.39 to C$27.80. The stock is down about 41 percent in the same period.

($1=$1.25 Canadian)

Additional reporting by Scott Anderson; editing by Rob Wilson

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