Weak oil and debt markets may bedevil oil sands plans

By Jeffrey Jones - Analysis

CALGARY, Alberta (Reuters) - A double whammy of tumbling crude prices and shaky credit markets could force some companies to delay multibillion-dollar Canadian oil sands projects, cutting the country's overall output forecast.

Most at risk are developments that are in the design phase but have yet to start construction. Some have already been delayed due to surging costs, a tight labor market and stricter regulatory scrutiny.

"It's starting to weigh on people's minds as to what is the break point," FirstEnergy Capital Corp analyst William Lacey said.

Crude sank nearly 5 percent to $96.60 a barrel on Monday, its lowest level in seven months, on early signs that Hurricane Ike had spared most U.S. energy infrastructure in the Gulf of Mexico and as the U.S. financial system creaked amid Lehman Brothers Holdings' LEH.N bankruptcy.

Falling demand has pulled U.S. crude down by a third since hitting an record high above $147 a barrel in July.

The oil sands in the Canadian province of Alberta represent the largest oil deposits outside the Middle East and are seen as a key source of secure supply for the United States. Projects totaling more than $100 billion are under way or on the drawing board.

But the crude from the oil sands is far more complicated and pricey to extract than Saudi Arabia's conventional oil.

Imperial Oil's (IMO.TO) C$8 billion ($7.5 billion) Kearl project and the C$14 billion Fort Hills development, operated by Petro-Canada (PCA.TO), are two that could face delay, Lacey said.

But Imperial, which last month said Kearl will likely be delayed by a year to 2012, will not make a new decision based on short-term price fluctuations, spokeswoman Kim Fox said.

Petro-Canada declined to comment on the potential for the Fort Hills go-ahead decision to be pushed back, saying only that its own balance sheet is strong.

FINANCING SOURCES NARROW

The field of financing sources for big projects is narrowing with Lehman's bankruptcy and Bank of America's (BAC.N) planned takeover of Merrill Lynch MER.N.

"The overall ability to take this sort of product on on the debt side has become compromised, at least in the near term," Lacey said.

Developers that are already in the construction stage of big expansions, such as Suncor Energy Inc (SU.TO) and Royal Dutch Shell (RDSa.L), will likely stay on track.

Suncor's Voyageur and Firebag expansions are moving ahead, and the company still forecasts output of 550,000 barrels a day, about double today's volume, by 2012, spokeswoman Shawn Davis said.