Oil sand stocks, reality after all the "pumping"

Discussion in 'Commodity Futures' started by Option Trader, Jul 13, 2006.

  1. CALGARY, Alberta (Reuters) - Oil sands developers may have to rework or delay projects to avoid massive cost overruns, analysts and investors said on Thursday, after Shell Canada Ltd said expanding its Athabasca Oil Sands Project would cost billions more than earlier estimates.

    Western Oil Sands Inc., which owns 20 percent of Shell Canada's oil sands project, said late on Wednesday that a planned expansion of its oil sands mine and upgrading refinery could cost close to C$11 billion, 50 percent more than estimated just a year ago.

    The project, which will boost output by some 100,000 barrels a day to about 255,000, faces rising costs for labor, materials and equipment.

    A spokeswoman said Shell Canada, 78 percent owned by Royal Dutch Shell Plc , is deferring a final decision on going ahead with the project until the fourth quarter instead of September as it firms up a budget.

    But other operators in the oil-rich region may also need to rethink plans as costs rise across the board.

    "They are going to have to find ways to get their costs down," said Glenn MacNeill, chief investment officer at Sentry Select Capital Management in Toronto. "Clearly they can't have these cost escalations continue and still be profitable."

    Some C$125 billion in projects are either planned or under construction in Alberta's oil sands region, which contains an estimated 174 billion barrels of recoverable oil, a resource second in size only to Saudi Arabia's reserves.

    Shell Canada's cost woes are expected to spread to other firms planning large-scale projects, and shares of smaller firms operating in the region plunged on word of the cost pressures.

    Western Oil Sands shares dropped C$2.59, or 8.4 percent to C$28.41 by mid-afternoon. UTS Energy Corp., a 30 percent owner of Petro-Canada's planned Fort Hills oil sands project, fell 52 Canadian cents, or 8.6 per cent, to C$5.56 on the Toronto Stock Exchange.

    Out of control costs and a lack of skilled labor have been a prominent feature of nearly all major oil sands projects and the C$8.4 billion tally for a recent 100,000 barrel a day expansion of Syncrude Canada Ltd.'s mine and upgrading refinery was billions more than first estimates.

    Firms like Canadian Natural Resources Ltd., which is now building its Horizon oil sands mine and upgrading refinery, have kept costs in check by flying in labor from elsewhere in Canada and internationally.

    But others, particularly those who will be building their projects at the end of the decade, may face even greater competition to hire a work force from other major construction projects like the 2010 Winter Olympics in Vancouver.

    "The further along you are with these projects the better off you are," said Martin Molyneaux, analyst at FirstEnergy Capital, Calgary. "The more theoretical the project, the less design work done, the more price risk you face. It's not a pretty situation."
  2. Chagi


    I also found a housing stat interesting from earlier this week - houses in Calgary, Alberta were up something like 50% year over year. Utterly insane.

    I've been harping for a bit now that a little bobble in oil prices could lead to some of these megaprojects being deferred, ironically it seems instead that rising labour and material costs are more likely to cause these delays.