(Refiles to indicate in headline is Update 1) (In U.S. dollars unless noted)
By Jeffrey Jones
CALGARY, Alberta, April 1 Existing oil sands operations generate double-digit returns with oil around $50 a barrel and costs of new projects have started to fall in the industry downturn, the chief executive of Suncor Energy Inc (SU.TO), Canada's No. 2 oil sands producer, said on Wednesday.
The economics for Suncor -- which has launched an C$18.4 billion ($15 billion) takeover of Petro-Canada PCA.TO -- are closer to break-even with oil at $40 a barrel, but prices may only dip that low once more this year, CEO Rick George said.
"You can make a great return, double-digit, well above our cost of capital, in the high $40 and low $50 range," George told an energy conference hosted by the CFA Institute.
Crude oil hit a record above $147 last July, but with the recession the price tumbled below $34 earlier this year, prompting companies to cancel or postpone more than $90 billion worth of expansions and new projects.
U.S. benchmark crude fell $1.27 on Wednesday to settle at $48.39 a barrel.
Last year, at the height of the boom, George said new developments required oil prices above $80 a barrel, as labor shortages and inflation in materials like steel led to runaway costs in the oil sands of northern Alberta.
But the downturn has "flushed" the industry of weaker companies and marginal projects, pushing costs down, he said.
"Through this period, the pricing point has come back more to the industry as opposed to our suppliers and contractors," he said. "Operating costs, we should see drop by 10-15 percent on a comparative basis. And we should see our capital investment costs drop in the 20-25 percent range."
Last week, Suncor and Petro-Canada announced an all-share deal that would create the country's largest oil company and a dominant player in the oil sands.
Petro-Canada had been holding off on its C$21-billion-plus Fort Hills oil sands project as costs skyrocketed and oil prices tumbled.
Suncor halted all work its C$20.6 billion Voyageur expansion project in January.
George said he believes the worst may be over for oil prices, with global demand still expected to increase over the next decade and investment in new production capacity in slowdown mode.
"It may test $40 one more time this year, I wouldn't be at all surprised at that, then I think you'll see a slow, steady rise," he said. "The one thing you've got to know is there are many countries around the world ... that can't take an oil price below $40."
Suncor shares rose 41 Canadian cents to $28.55 on the Toronto Stock Exchange. Petro-Canada gained 49 Canadian cents to C$34.36.
($1=$1.26 Canadian) (Reporting by Jeffrey Jones; editing by Rob Wilson)