October 30, 2008 / 2:49 PM / 9 years ago

UPDATE 3-Shell to delay oil sands expansion project

(Adds details)

By Tom Bergin and Scott Haggett

LONDON/CALGARY, Oct 30 (Reuters) - Royal Dutch Shell Plc (RDSa.L) will delay a decision on expanding its Canadian oil sands project as rising costs and falling crude prices raise questions about the profitability of the industry.

The move is the latest in a line of project deferrals among companies active in squeezing crude from Alberta's bitumen-soaked soil in a trend that is dimming Canada's energy production outlook.

Shell Chief Executive Jeroen van der Veer said the company had been working towards approving a second, 100,000 barrel per day, expansion of its Athabasca oil sands project in 2009 but will wait until industry costs moderate before proceeding.

"We have decided to delay the final investment decision on the Athabasca second expansion ... (while) we wait for costs to cool down in Alberta before any new investment decisions," he told reporters on a conference call on Thursday.

Inflationary pressures have plagued Canadian oil sands projects as the cost of steel and other commodities climbed and competition for the small pool of skilled workers in northern Alberta forced labor cost higher.

Indeed, Petro-Canada PCA.TO said the estimated costs of its planned Fort Hills oil sands project had climbed by more than half in under a year, rising to at least C$21 billion.

Petro-Canada said last week it may delay building the project's upgrader, to convert tar-like bitumen into refinery-ready crude, in the hopes of paring the price tag by about C$10 billion.

Other companies slowing down their Alberta oil sands developments include Suncor Energy Inc (SU.TO), which said it will delay completion of its C$20.6 billion expansion program by a year to 2013, and Nexen Inc NXY.TO and partner OPTI Canada OPC.TO, which postponed an expansion decision.

Van der Veer said Shell was proceeding with the previously approved first expansion stage, to add 100,000 barrels a day (bpd) of production in 2011. The costs of that expansion was last pegged at C$11.2 billion.

Shell has among the most ambitious plans to exploit the oil sands of northern Alberta, with a target of ramping up production from a current 155,000 bpd to 770,000 barrels per day from the massive resource.

The remote oil sands regions of Alberta contain about 173 billion barrels of oil, the biggest reserves outside the Middle East. But while the oil is easily found, it is technically challenging and expensive to produce.

Shell has a 60 percent stake in the Athabasca project. Its partners, Marathon Oil Corp (MRO.N) and Chevron Corp (CVX.N), each have a 20 percent interest.

Marathon said on Thursday that current market conditions have forced it to delay work on an expansion of its Detroit refinery that would let it process oil sands bitumen.

Bucking the trend, Exxon Mobil Corp (XOM.N) said on Thursday it considered the economics of the C$8 billion Kearl oil sands project it and majority owned Imperial Oil Ltd (IMO.TO) "robust" and said a final investment decision on the project will be made sometime in 2009. (Additional reporting by Anna Driver in Houston)

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