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Page added on April 29, 2009

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Oil Sands Cos Still Hesitate on Projects Despite Falling Costs

Costs in Canada’s pricey oil sands are starting to fall but nervous developers are still leery of giving the green light to stalled projects.

Last week, Husky Energy Inc. (HSE.T) said estimated costs for its proposed Sunrise oil sands development — a joint venture with BP PLC (BP) — had nearly halved to C$2.5 billion, from earlier projections of C$4.5 billion. The company is the first to provide hard numbers but there is plenty of informal chatter of cost savings within Alberta’s oil sands following the wave of project cancellations and delays at the end of last year.

“We’re hearing anecdotally that costs are down 20%, 25%,” but Husky’s new estimates provide a concrete point of reference, said Steve Fekete, a Calgary-based senior principal at consulting firm Purvin & Gertz.

Until recently, oil sands companies were pursuing projects with swollen, multibillion-dollar budgets, confident at turning a profit with crude prices above $100 a barrel. Inflation soared as companies flocked to exploit Alberta’s massive crude reserve — the biggest outside Saudi Arabia — and by last summer, analysts reckoned that the costs for a typical oil sands project had more than quadrupled since 2003.

But when crude oil prices collapsed, so did project economics and nearly C$200 billion ($164 billion) worth of proposed developments have been affected, according to recent estimates by Merrill Lynch. Fewer projects mean less competition for a limited pool of labor, while global steel prices have slumped more than a third from last year. But most companies still need $80 a barrel crude to push ahead with new projects, and the speed of the oil price plunge is likely to render company executives much more cautious at restarting developments even after prices recover.

Rigzone



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