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UPDATE 2-Shell scraps plans for new Canadian refinery

(Adds analyst, CEO comments)

CALGARY, Alberta, July 8 (Reuters) - Royal Dutch Shell Plc RDSa.L has canceled plans to build a new multibillion-dollar refinery near Sarnia, Ontario, due to poor market conditions and surging construction costs, the oil major said on Tuesday.

Shell had been studying the feasibility of a new plant in St. Clair Township in southwestern Ontario over the past two years to process crude from its expanding Alberta oil sands operations. The refinery was to have processed 150,000 to 200,000 barrels a day.

“This decision is a very difficult one for Shell and it is only taken after careful consideration,” Amrik Ahluwalia, Shell’s general manager of manufacturing expansion, said in a statement on the company’s website.

Curiously, neither Shell’s top Canadian executive nor its media relations staff mentioned the cancellation at a briefing with reporters earlier in the day about its oil sands business.

The company had studied the environmental impact and held consultations with residents in the Sarnia area, where it already runs a 72,000 barrel a day refinery.

Some environmental groups opposed the new project.

Surging costs and a stretched labor force have hit projects throughout Canada’s oil and gas industry, forcing some to be delayed in recent months.

Meanwhile, prices for crude oil have climbed rapidly to records near $150 a barrel in recent months, squeezing profit margins for refiners despite unprecedented gasoline prices.

“So there’s not a lot of incentive to get these refineries up and operating, even though there’s pretty strong demand for gasoline and lower gasoline prices,” Tristone Capital analyst Chris Feltin said.

“There’s a lot of uncertainty surrounding construction costs, whether it’s for materials like steel, or labor in terms of welders or electricians, all of the key components that go into these large, long-term projects.”

Plans for a $4.6 billion refinery on Canada’s East Coast were thrown into limbo last month when would-be developer Newfoundland and Labrador Refining Corp filed for protection from creditors while it restructures.

At the media briefing, David Collyer, Shell’s chairman for Canada, said the company may build upgrading capacity at two U.S. refineries rather than going with a full, C$27-billion expansion of its Alberta upgrading complex near Edmonton.

It has proposed boosting oil sands output to 770,000 barrels a day over the next several years, and two years ago announced plans for upgrading facilities to be built in four 100,000-barrel-a-day stages over several years.

Upgraders turn tar-like crude from oil sands into refinery-ready light oil.

“There’s a range of options being looked at. One potential outcome is that all that upgrading’s done in Alberta,” Collyer said. “Another option, I suppose at the other extreme, is that none of it happens in Alberta and all of it happens in the U.S.”

A current C$12.8 billion expansion of its upgrader will boost output to 255,000 barrels a day around 2010.

Shell refineries in Martinez, California, and Deer Park, Texas, would have to be retooled to run the Canadian bitumen, Collyer said.

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