UPDATE 3-Petro-Canada defers decision on Fort Hills mine

* Delays investment decision on oil sands mine

* Upgrader on hold to cut costs

* Waiting for labor, material prices to fall (Recasts with new details and comments; updates shares)

By Scott Haggett

CALGARY, Alberta,, Nov 17 (Reuters) - Petro-Canada (PCA.TO) said on Monday it will delay a final go-ahead for the mining portion of its planned C$21 billion ($17 billion) Fort Hills project, looking to the weak economy and falling oil to lower overheated costs that have plagued rival oil sand ventures.

The company, Canada's No. 4 integrated oil exploration and refining firm, said it will not make a decision on proceeding with the mine until next year, instead of December as initially promised, because it expects costs to decline as oil sands projects fall by the wayside.

"We can take advantage of the softening market to sharpen our pencils and drive the costs down," Neil Camarta, Petro-Canada's senior vice-president, oil sands, said on a conference call. "This is a big undertaking and we need to take the extra time to get it right."

As well, Petro-Canada, which holds a 60 percent stake in the Fort Hills project, confirmed it has decided to hold off building an expensive upgrader to process the 160,000 barrels a day of tar-like bitumen the mine will produce,

That should shave about C$10 billion off the project's enormous costs, which by last September had climbed 50 percent in less than a year.

SPATE OF DELAYS

Now, with Petro-Canada's decision, every major integrated oil sands project that includes an upgrader has either been delayed or deferred as producers await higher oil prices or lower costs.

Most analysts estimate that projects need oil prices near $100 a barrel to make a decent profit. However recession fears and the credit crunch have pushed oil below $60, after it topped $147 in July. CLc1

So, instead of rushing to tap the biggest storehouse of oil outside the Middle East, companies are rushing to the exits. Royal Dutch Shell (RDSa.L), Suncor Energy Inc (SU.TO), Nexen Inc (NXY.TO) and others have all rethought ambitious oil sands plans that were based on strong prices and easy credit.

"Every major oil sands participant has now put on the brakes," said William Lacey, an analyst with FirstEnergy Capital. "This the right decision (for Petro-Canada) to go forward with.... They are living within their means."

The mine will produce about 160,000 barrels of tar-like bitumen a day when complete. Although the terms of its lease with the Alberta government dictate that production begin by 2011, delaying the final go-ahead will mean Petro-Canada will be offside on the promised date.

Camarta said the company will begin talking to the Alberta government later this week about amending the terms of its lease and it hopes the province will agree to the schedule change.