Oilsands sector shudders under growing costs and environmental pressures
CP
Yahoo Canada
Calgary(CP) - Some of the sparkle appears to be coming off what has been the jewel of Canada's energy sector, as the northern Alberta oilsands face runaway costs, unbridled development and mounting environmental concerns.
But with oil prices hitting new record highs above $75 US per barrel last week amidst mounting political troubles in some of the world's largest oil producing regions, frenzied expansion in the oilsands could potentially continue.
"What we really need to see is a stabilization of oil prices," said Martin Molyneaux, managing director of institutional research for Calgary-based FirstEnergy Capital.
"Everybody has seen the costs going up, but they're seeing potential revenues going up at the same time," he said.
"All of this will settle itself out, when we see stable oil prices. But as long as oil prices keep on ratcheting up, companies are going to want to pursue the prize."
With crude prices remaining at near record levels for so long, oil producers have so much cash to play with that the re-deployment of capital is "a gargantuan issue," said Molyneaux.
Just as big an issue, however, are the potentially out-of-control costs required to build oilsands mega-projects in the over-heated economy of northern Alberta.
Last week, Shell Canada (TSX:SHC) and partner Western Oil Sands (TSX:WTO) rattled the industry with vague warnings that the first major expansion at their Athabasca oilsands project, already carrying a $7.3-billion pricetag, is facing "significant upward pressure" on costs.
Western went one step further, saying the price could be as much as 50 per cent higher, or about $11 billion for an extra 100,000 barrels per day.
Further updates on the state of the project will come by the end of the month, while a final go-ahead decision is slated for the end of the year.
The market chill was immediate, with Western shares falling more than 13 per cent or $4.10 in the two days after the cost warning. Analysts said that the companies would need oil to stay at $50 US or higher to make decent rates of return.
Nearly all major energy producers with oilsands projects or expansions in the works also saw their share values erode on the Toronto Stock Exchange.
Although enormous cost overruns are nothing new to the oilsands sector - no big project has been completed in the past five years without huge price increases - the effect of this latest cost warning remains unclear.
Industry observers predicted that companies with projects already on the go and major steel and fabrication orders already in the queue could be all right. But future ones may be further cast in doubt.
All this could potentially put a damper on an industry which has an expected $100-billion worth of capital investments coming in the next decade alone.
In a report last month, the National Energy Board said oilsands production is expected to rise from 1.1 million barrels per day to three million barrels by 2015 - becoming one of the few regions in North America to actually increase output in the future.
Runaway costs were not the only worrisome news for the oilsands either.
Environmental concerns also hit the headlines, with former U.S. presidential candidate Al Gore saying oilsands production was a huge waste of natural gas and a major environmental mess.
"And they have to tear up four tonnes of landscape, all for one barrel of oil," Gore said in the latest issue of Rolling Stone.
"It is truly nuts. But you know, junkies find veins in their toes. It seems reasonable, to them, because they've lost sight of the rest of their lives."
Alberta Premier Ralph Klein retaliated, saying: "I don't know what he proposes the world run on, maybe hot air."
On Friday, a non-profit group called the Arctic Indigenous Alliance protested oilsands development outside of the Smithsonian Museum, which currently has an exhibit on Alberta's oilsands.
"You can be assured the exhibition will not mention the environmental and human impact this will have on the Arctic and more importantly, to the world," said group director Elaine Alexie.
"The further developments of the fossil fuel industry will not stop climate change, but continue to threaten our ways of life."
Late last week, the Syncrude joint venture, which is the largest oilsands development in the world, announced plans to re-start its latest $8.4-billion expansion after it was shut down in May by the province's environment ministry due to urine-like smells wafting in to neighbouring communities from the company's new technology.
"There remains the possibility that some odours may be noticeable during the July start-up period although Syncrude is making every effort to ensure this work is completed safely and without any impacts on people in neighbouring communities," the company said.
