Financial woes to temper Canadian oil forecast

By Jeffrey Jones - Analysis

CALGARY, Alberta (Reuters) - Skidding oil-company stock prices and weak crude markets are setting the stage for another clawback in Canada's oil production outlook just as its biggest customer, the United States, seeks more secure supply.

Analysts say the worsening market meltdown and tumbling commodity prices spell conservative spending plans in corporate budgets, now being devised for 2009.

That could mean more slowdowns in plans for oil sands projects and conventional drilling in Western Canada as companies seek to protect their cash.

"Absolutely I think the expectations for oil sands growth out of Canada will likely have to come down over the next several years," Tristone Capital analyst Chris Feltin said.

"Producers are going to make the prudent decision, and it may make sense to delay projects, to either wait for more favorable oil prices or cost estimates or staggered development among the various projects so they're not all happening at the same time."

Despite the weak market, project costs remain high. Last month, Petro-Canada (PCA.TO) said the estimate its Fort Hills project in Alberta had climbed by 50 percent from its last guess to more than C$21 billion ($19 billion).

The company and its partners are searching for ways to cut costs and get cash flowing faster, possibly by pumping raw tar-like bitumen before completing a processing plant, executives have said.

Petro-Canada still aims to make its go-ahead decision by the end of 2008, spokeswoman Andrea Ranson said. She pointed out the bulk of the financing needs are about two years away.

Such big projects as Nexen's (NXY.TO) Long Lake development and Canadian Natural Resources' (CNQ.TO) Horizon venture are now in startup mode after years of construction, so that means a solid boost to the short-term production outlook.

But several companies have postponed their projects, blaming rising costs tied to a tight labor market and inflation in materials such as steel.

That led the Canadian Association of Petroleum Producers in this summer to temper its view of oil sands output, forecasting 2.8 million barrels a day by 2015, down from its previous outlook of 3.4 million.

CAPP President David Collyer told Reuters last month that it is more likely that the forecast will be reduced again than increased given sputtering markets.

INDUSTRY WOES DEEPEN

Since then, those conditions have worsened for the industry. Oil settled below $89 a barrel on Wednesday, down 40 percent from its above $147 this summer.

Meanwhile, stock prices have tumbled, in many cases to less than half of highs set just five months ago.