March 9, 2017 / 9:24 PM / 2 years ago

Canada oil sands capital exodus imperils future development

CALGARY, Alberta (Reuters) - The exodus of international players from Canada’s costly oil sands is raising fresh doubt over future development prospects for the world’s third-largest crude reserves as the region struggles to compete with cheap U.S. shale plays.

FILE PHOTO: The Shell logo is seen at the 20th Middle East Oil & Gas Show and Conference (MOES 2017) in Manama, Bahrain, March 7, 2017. REUTERS/Hamad I Mohammed/File Photo

The latest withdrawals from the oil sands have cast a pall on Alberta’s economic outlook. The energy sector makes up one sixth of Canada’s economy, while in Alberta oil and gas contributes a fifth of provincial gross domestic product.

Royal Dutch Shell and Marathon Oil Corp sold off billions of dollars in oil sands assets on Thursday, the latest sign that global oil majors are abandoning the region.

Shell Canada President Michael Crothers said the company was selling a large chunk of its oil sands assets to Calgary-based Canadian Natural Resources Ltd because they did not fit within Shell’s international portfolio, while Marathon more explicitly summarized the problem.

“Historically, our interest in the Canadian oil sands has represented about a third of our company’s other operating and production expenses, yet only about 12 percent of our production volumes,” chief executive Lee Tillman said in a statement.

As well as selling off a 20 percent stake in the Athabasca Oil Sands project, now majority-owned by CNRL, Marathon is buying 70,000 net acres in the Permian basin shale play as it streamlines its portfolio to concentrate on higher margin, lower cost U.S. assets.

Canada’s oil sands carry some of the world’s highest full cycle breakeven costs and were battered by the global crude price crash that started in 2014. Capital investment in the Canadian energy sector tumbled 62 percent in two years, according to the Canadian Association of Petroleum Producers, and shows little sign of recovering.

Rafi Tahmazian, senior portfolio manager at Calgary-based Canoe Financial LP, said stricter federal and provincial environmental polices were deterring foreign investors and Canada alone did not have the financial capacity to drive oil sands growth.

“There’s no incentive for foreign investment to say let’s go into Canada,” he said. “The message sent (by government) is we want Canada to become a national park, which is government-operated and non-revenue generating.”

Tahmazian said recent comments by Prime Minister Justin Trudeau that the oil sands needed to be “phased out”, which Trudeau later backtracked on, reinforced that message.

Oil-rich Alberta was plunged into recession with the global crude prices crash and a permanently weakened energy industry would likely have long-term knock-on effects, some analysts said.

“This ... will eventually force the Alberta economy to restructure and diversify its economic engine,” said Benjamin Tal, senior economist at CIBC.

Reporting by Nia Williams; Editing by Andrew Hay

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