Canadian Operators Revive Oil Sands Projects

OTTAWA (Dow Jones), Jan. 21, 2010

Companies are reviving projects in Canada's oil-sands region, a sign that life is returning to an industry hit hard by the economic downturn.

Two major oil-sands projects received funding this week. The Canadian arms of ConocoPhillips and Total SA said they are funding an expansion of their Surmont joint venture, and Calgary-based Husky Energy Inc. said Thursday it will spend C$2.5 billion (US $2.4 billion) on the first phase of its Sunrise project.

Both projects are moving ahead because costs have fallen and returns are higher than a year ago. When oil prices neared $150 a barrel in the summer of 2008, labor and engineering costs skyrocketed as companies raced to lock-in oil-sands projects. But those projects turned sour as crude prices plummeted below $50 a barrel last year as the global economic and financial crisis took a toll.

The downtown has lowered the cost of materials and made labor more productive, as fewer projects require fewer workers and companies can chose from among the best available. And projects are profitable with oil near $80 a barrel.

Husky estimates that it will save over C$1 billion on the first phase of its Sunrise project, which was initially expected to cost between C$3.8 billion and C$4 billion.

"With the downturn and with lower global oil demand and lower prices, the companies took the opportunity to review their projects and come out with greater cost savings and efficiencies before going forward," BMO Capital Markets oil industry analyst Randy Ollenberger said.

While Husky managed to save nearly 40% on Sunrise, Ollenberger estimated that companies can expect to save roughly 20% from estimates made during peak activity levels.

Another factor bringing down the cost of oil-sands projects is a narrowing in the difference in the price between heavy and light crude oils over the last year. Heavy oil usually trades at a discount to lighter oils as it is more expensive to refine, but that discount tends to narrow as production rates fall in response to lower prices, as producers cut back on heavy oil production first.

That has made it more profitable for oil-sands producers to ship heavy oil sands crude without further upgrading, and delay the construction of expensive upgrading facilities that transform heavy crude into lighter products.

The first phase of Husky's Sunrise project is expected to begin construction this year, produce 60,000 barrels of oil a day by 2015 and 200,000 barrels a day of production by 2020.

ConocoPhillips and Total's Surmont project is currently producing about 20,000 barrels of oil a day and is expected to produce 110,000 barrels of oil when construction of the second phase is complete in 2015.

Husky shares declined 0.9% to C$28.44 in recent trading in Toronto; ConocoPhillips shares declined 0.6% to $52.77 in recent trading in New York.

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