September 22, 2011 / 10:24 PM / in 6 years

Price drop seen as no threat to oil sands expansion

CALGARY, Alberta (Reuters) - A sharp drop in oil prices on Thursday is no threat to plans to accelerate development of northern Alberta’s oil sands, even as shares of Canada’s biggest oil producers turned sharply lower.

Fears of a new recession, spurred by weak manufacturing data from China and a glum outlook on the U.S. economy from the Federal Reserve, pushed benchmark North American crude futures down by $5.41 to $80.521 a barrel, the lowest level since August 9.

The price drop sent the shares of Canada’s biggest oil producer, Suncor Energy Inc (SU.TO), tumbling C$1.92, or 6.8 percent, to C$26.21 on the Toronto Stock Exchange.

Other major producers were also hit hard. Nexen Inc NXY.TO dropped 86 Canadian cents, or 5 percent, to C$16.42, and Husky Energy Inc HSE.TO fell 99 Canadian cents, or 4.3 percent, to C$21.94.

The Toronto market’s index of energy shares .SPTTEN sagged 4.7 percent to 243.01, its lowest level in more than two years.

Though the lower prices will bite into profits, they are unlikely to force big producers to winnow down plans to expand their oil sands operations, said Andrew Potter, an analyst at CIBC World Markets.

The oil sands of northern Alberta are the world’s third-largest crude reserve. Production from the region is expected to rise to 2.1 million barrels per day by 2015 from about 1.5 million bpd currently.

Companies like Suncor, Husky, Cenovus Energy Inc (CVE.TO) and others are staking billions on new, large-scale projects to exploit the reserves, using vast mines or more compact thermal operations, where steam is injected into the earth to liquefy reserves so they can flow to the surface.

Most of those projects are expected to be profitable even at current oil prices.

“They are economic at $80 (per barrel), no question,” said Robert Bedin, director of energy research at ITG Investment Research. “The overall softening (of oil prices) over the past few weeks is not changing things dramatically.”

Integrated oil companies such as Suncor and Husky, which also refine oil are also still making rich profits on the sale of gasoline and other refined products, allowing them to weather any temporary dips in crude prices.

“The integrated and the big oil sands (companies) would probably need oil to move below $70 a barrel before we’d see any big cutbacks on oil sands spending,” Potter said.

“The integrateds are still getting big cash flow from downstream, liquidity is in good shape, balance sheets are in good shape ... so for the big long-term projects we’re not going to see cutbacks yet.”

Reporting by Scott Haggett; editing by Peter Galloway and Rob Wilson

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