(Adds details on shares, updates prices. In U.S. dollars
By Scott Haggett
CALGARY, Alberta, Sept 19 New oil sands mine
projects need crude prices to remain over $100 a barrel to turn
a decent profit, analysts at UBS Securities said on Friday
following Petro-Canada's PCA.TO announcement that costs for
its planned Fort Hills project had soared by more than half.
Andrew Potter, an analyst at UBS, said rising costs have
raised the bar for massive oil sands projects, as inflated
costs for labor in particular, eat into owners' profits. That
could force a number of projects in the region to be delayed,
reworked or sold.
"Producers will have to defer projects to get a handle on
costs," Potter said. "You'll probably also see more joint
ventures with U.S. refiners because that, in my view, is
probably still a cheaper alternative to building an upgrader in
Alberta. And you may see more bitumen-only projects go ahead
... and you will see some corporate consolidation."
Petro-Canada said on Wednesday that the price of its
140,000 barrel per day Fort Hills project had risen by at least
50 percent from a year earlier estimate to C$21 billion ($20
However, Potter estimates the project will cost at least
C$25.3 billion, including initial design and management costs
left out of Petro-Canada's forecast.
The oil sands contain an estimated 173 billion barrels of
oil, a resource second in size only to Saudi Arabia's reserves.
More than C$50 billion has already been spent to tap the
resource and a further C$100 billion has been pledged to new
Inflation has been the oil sands' hobgoblin, with the costs
of some projects doubling as the price of steel and other
materials has skyrocketed and companies find it difficult to
find skilled labor pool in remote northern Alberta.
Where oil prices of $75 a barrel had been adequate to
ensure a good profit, Potter said $100 a barrel is now likely
needed to produce a 10 percent return.
Others estimates are even higher, with William Lacey, an
analyst with FirstEnergy Capital, forecasting that the Fort
Hills project will need crude at $115 a barrel.
Oil prices, which surged to more than $147 a barrel in
July, have fallen swiftly since, but jumped on Friday to
$104.55, up $6.67 on the day, on optimism that a rescue package
engineered by the U.S. government would stabilize a battered
The jump in oil prices pushed the shares of oil sands
producers sharply higher on the Toronto Stock Exchange.
Suncor Energy Inc (SU.TO), the No.2 oil sands producer
skyrocketing more than 12 percent, or C$5.59, to C$5.59.
Canadian Natural Resources Ltd (CNQ.TO), which is starting
up its Horizon oil sands project, jumped C$8.66, or 11.1
percent, to C$86.66 and Canadian Oil Sands Trust, the biggest
owner of the Syncrude Canada Ltd oil sands project, rose
C$6.70, or 18 percent, to C$44.95, despite fears that shares
may have rebounded too much on Friday.
"We've had a fantastic rally but I'm a little bit
skeptical," said Lacey, "I don't think we've solved all of the
(problems) that are out there."
Petro-Canada has a 60 percent share in Fort Hills, which
includes an oil sands mine north of Fort McMurray, and an
Edmonton-area upgrader to turn the mined bitumen into
refinery-ready synthetic crude. UTS Energy Corp UTS.TO and
Teck Cominco (TCKb.TO) each hold 20 percent of the project,
which would be the fifth major mining project in the region
when completed in 2012.
A planned second phase would push output to 280,000 bpd by
Petro-Canada blamed the huge cost increase on rising
materials prices, a tight labor supply and higher project
Potter said rising construction costs may give an advantage
to less labor-intensive thermal projects, where steam is pumped
into wells to liquefy the tarry bitumen so it can flow to the
"I would presume (thermal projects) will still see
inflation but I don't think it's going to be as bad as on the
mining side," Potter said.
(Reporting by Scott Haggett; editing by Rob Wilson)