November 17, 2008 / 1:43 PM / 9 years ago

Petro-Canada defers decision on Fort Hills mine

CALGARY, Alberta (Reuters) - Petro-Canada said on Monday it will delay a final go-ahead for the mining portion of its planned C$21 billion ($17 billion) Fort Hills project, looking to the weak economy and falling oil to lower overheated costs that have plagued rival oil sand ventures.

The company, Canada’s No. 4 integrated oil exploration and refining firm, said it will not make a decision on proceeding with the mine until next year, instead of December as initially promised, because it expects costs to decline as oil sands projects fall by the wayside.

“We can take advantage of the softening market to sharpen our pencils and drive the costs down,” Neil Camarta, Petro-Canada’s senior vice-president, oil sands, said on a conference call. “This is a big undertaking and we need to take the extra time to get it right.”

As well, Petro-Canada, which holds a 60 percent stake in the Fort Hills project, confirmed it has decided to hold off building an expensive upgrader to process the 160,000 barrels a day of tar-like bitumen the mine will produce,

That should shave about C$10 billion off the project’s enormous costs, which by last September had climbed 50 percent in less than a year.

SPATE OF DELAYS

Now, with Petro-Canada’s decision, every major integrated oil sands project that includes an upgrader has either been delayed or deferred as producers await higher oil prices or lower costs.

Most analysts estimate that projects need oil prices near $100 a barrel to make a decent profit. However recession fears and the credit crunch have pushed oil below $60, after it topped $147 in July.

So, instead of rushing to tap the biggest storehouse of oil outside the Middle East, companies are rushing to the exits. Royal Dutch Shell, Suncor Energy Inc, Nexen Inc and others have all rethought ambitious oil sands plans that were based on strong prices and easy credit.

“Every major oil sands participant has now put on the brakes,” said William Lacey, an analyst with FirstEnergy Capital. “This the right decision (for Petro-Canada) to go forward with.... They are living within their means.”

The mine will produce about 160,000 barrels of tar-like bitumen a day when complete. Although the terms of its lease with the Alberta government dictate that production begin by 2011, delaying the final go-ahead will mean Petro-Canada will be offside on the promised date.

Camarta said the company will begin talking to the Alberta government later this week about amending the terms of its lease and it hopes the province will agree to the schedule change.

“We broke the ice with them and the doors are open,” Camarta said. “We’ll be starting our discussions later this week.”

Camarta said Petro-Canada will revisit every contract the project has so far signed and will look for lower prices from its suppliers.

The rush in the oil sands prior to the collapse of the credit markets strained the supply of skilled tradesmen in isolated northern Alberta, pushing up labor costs.

Camarta said the sudden collapse in the number of projects in the region will likely make suppliers more amenable to lowering prices.

“The first thing we are going to do is pull in the purse strings,” he said. “We’ll be going back and taking a look at every contract and purchase order.... We are expecting our contractors and suppliers to line up with us on that. They’re a lot hungrier than they were a few months ago.”

The other partners in the Fort Hills project, each with a 20 percent stake, are UTS Energy Corp and Teck Cominco Ltd.

Shares of Petro-Canada fell C$1.27 to C$24.51 by early afternoon on Monday on the Toronto Stock Exchange. UTS shares fell 9 Canadian cents to 82 Canadian cents while Teck’s class B shares rose 42 Canadian cents to C$6.77.

($1=$1.22 Canadian)

Additional reporting by Arup Roychoudhury; editing by Rob Wilson

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