More oil firms move into costly oil sands

By Alex Lawler - Analysis

LONDON (Reuters) - More oil firms are joining the rush to tap oil from sands in Canada's Alberta province, a costly process that may secure future output but needs higher oil prices to make money.

Norway's Statoil (STL.OL: Quote, Profile, Research, Stock Buzz) last month agreed to buy a privately held Canadian oil sands venture for nearly $2 billion, following deals by the likes of France's Total (TOTF.PA: Quote, Profile, Research, Stock Buzz) and China's Sinopec (0386.HK: Quote, Profile, Research, Stock Buzz).

The moves into oil sands offer access to oil reserves that rival those of Saudi Arabia and lie outside the volatile Middle East. But Statoil's deal looks expensive and the rewards lie far in the future, analysts say.

"I'm slightly skeptical about large new positions in Canadian oil sands," said Jason Kenney, oil analyst at ING in Edinburgh, who has a "hold" rating on Statoil.

"My view of the Statoil deal is it's a huge expense for a company of that size. It will be capital intensive. Cash-flow rewards are possible but they are a long way away."

Unlike conventional oil, oil sands are deposits of bitumen, a heavy, viscous oil that must be converted into an upgraded crude oil before refineries can use it to make gasoline and other fuels.

The rise in investment comes as companies face growing challenges in finding big sources of conventional oil. Saudi Arabia is off-limits to foreign oil investors and areas like the North Sea are in decline.

While conventional crude oil flows naturally from reservoirs or is pumped out, oil sands are mined or recovered "in situ" by injecting steam into the ground.