(Corrects size of Surmont oil sands project in 17th paragraph to 136,000 bpd from 100,000 bpd and in paragraph 18 corrects capacity of Port Arthur refinery to 174,000 bpd from 225,500 bpd)
* Total and Suncor re-evaluating Fort Hills, Joslyn projects
* Total Canada CEO says decisions to be made in second half
* Joint venture still active after Voyageur cancellation
CALGARY, Alberta, March 28 (Reuters) - This week's decision by Total SA's and Suncor Energy Inc to abandon a multibillion-dollar project to upgrade bitumen produced in the Canadian oil sands before shipping it abroad won't be the last rethinking of a capital-hungry oil sands project in a harsher economic climate.
But the chief executive of Total's Canadian unit said on Thursday he expects the problem of transport bottlenecks now plaguing the northern Alberta oil sands to be ironed out by the time his company starts up vast new mines in the region later this decade.
France's Total and Suncor, Canada's biggest oil producer, pulled the plug on the Voyageur upgrader on Wednesday because returns would not be high enough to justify the project, which would have transformed tar sands bitumen into lighter oil that can be more easily used by traditional refineries.
The companies have not said how much the upgrader would have cost, but analysts pegged the project at more than C$14 billion ($13.8 billion).
Total's Andre Goffart told Reuters that the partnership with Suncor is still solid as the companies evaluate the remaining projects in their joint venture: the Fort Hills and Joslyn oil sands mines, which will now produce bitumen diluted with lighter hydrocarbons instead of upgraded synthetic crude. The most recent start-up estimate for Fort Hills was 2017.
"If you look at the short term, those projects would be challenging because of the monetary netback we see right now because of the pipeline constraints," Goffart said.
"However, within the time frame we're looking at for both mines, we should have the logistical issue resolved, and we should see a more normal netback for bitumen... Taking into account those changes, both projects would be economically justified."
The partners are expecting to make a decision on whether to go ahead in the second half of this year, he said. Suncor has said it will provide cost details by the end of June.
A decision to abandon these projects would raise serious questions over the viability of new oil sands developments as Canada strives to cement its role as a major world producer.
The Canadian oil sands are the third-largest crude oil resource in the world after Saudi Arabia and Venezuela, and rising output from the oil sands and from North Dakota and elsewhere in the United States has allowed the United States to reduce its reliance on oil from other foreign sources.
Bitumen production in Alberta is on track to increase by more than half a million barrels a day in the next two years, roughly a 50 percent increase from 2012, according to a report this week by research firm Wood Mackenzie.
But the surging production has overtaxed pipeline networks across the continent, creating a bottleneck that in January pushed the price of Canadian heavy crude to more than $40 a barrel under benchmark West Texas Intermediate.
The discount has shrunk steadily since then and was around $15 under WTI on Thursday.
If TransCanada Corp's gets the green light to go ahead with its controversial Keystone XL pipeline from Alberta to Texas refineries, some of the pipeline pressures will ease. The Obama administration is expected to rule on it this summer, and if it is approved, TransCanada said Keystone XL could be in service by 2015.
The next major tranche of oil sands output is slated for the coming weeks with the start-up of Imperial Oil Ltd's C$12.9 billion Kearl mining project, and the company has said it has transport capacity and markets for the output.
ALREADY BIG PLAYERS
Suncor and Total already have large oil sands operations. Suncor's main business produces up to 350,000 barrels a day, more than 10 percent of Canada's overall oil output. It also has a 12 percent stake in the nearby Syncrude Canada Ltd project and produced about 123,000 barrels a day in the last quarter of 2012 from its Firebug operations.
Total produces bitumen from the 25,000 barrel a day Surmont steam-driven project in partnership with ConocoPhillips and is expanding that to 136,000 barrels a day.
Total has committed to capacity on Keystone XL so it can ship bitumen to its 174,000 barrel a day refinery in Port Arthur, Texas. It is also supporting the Enbridge Inc Northern Gateway pipeline and Kinder Morgan Energy Partners' Trans Mountain expansion, both of which would ship Alberta crude to Canada's West Coast.
The ability to expand market access will dictate the industry's growth plans, Goffart said.
"The main question will be the timing. The other question will be between logistics and production capacity," he said.
Though more expensive to develop than a steam-driven project, it is likely that Fort Hills will proceed, said David McColl, analyst at Morningstar, but it's unclear if the 2017 startup estimate is realistic.
"I would be absolutely shocked if that was canceled. What we really need with that project now is to understand the time line a little bit better, and what it's actually going to cost," McColl said. (Editing by Janet Guttsman; and Peter Galloway)