globeandmail.com

Report forecasts accelerated growth in oil sands

Friday, March 19, 2010

SHAWN McCARTHY

OTTAWA -- GLOBAL ENERGY REPORTER

Boom times are returning to the oil sands sector, bringing fatter profits and rapidly rising costs as companies move into expansion mode following last year's recession, the Conference Board of Canada says.

Conference Board economists say industry costs in northern Alberta will climb at an "unbelievable pace" over the next three years, but buoyant prices should ensure that profits return to pre-recession highs by 2014.

In a forecast released yesterday, the independent, non-profit research group said expansion of the oil sands should create an additional 15,000 jobs over the next three years, while profits from Canadian oil production will double to $16.1-billion in 2014 from $8.1-billion this year.

But that rosy outlook depends on global crude prices outpacing cost inflation in the Western Canadian oil sands sector.

The board expects crude prices to remain around $80 (U.S.) a barrel this year, increase slightly in 2011, then climb steadily to $114 by the end of 2014, as the global economy rebounds and the lack of investment in the past two years constrains supply.

"We expect to see very significant demand increases from Asia, despite relatively modest demand increases from OECD countries," board economist Todd Crawford said in an interview. "So we do have some growth in oil prices over the forecast, but it is certainly not going to return to the levels that we saw in 2008" when crude briefly topped $147 a barrel.

At those forecasted prices, Mr. Crawford expects the industry to invest heavily in oil sands expansions, driving production to 2.1 million barrels a day by 2014. This year, output should grow 6.7 per cent to 1.5 million b/d, he said.

A number of companies have already announced new projects or expansions, including Imperial Oil Ltd. at Kearl Lake; Cenovus Energy Inc. at Borealis, Foster Creek and Christina Lake; Canadian Natural Resources at Wolf Lake and Primrose; and Royal Dutch Shell PLC at Jackpine. And others are expected to follow in the next three years.

Alberta regulators have approved three expansion stages at Suncor Energy Inc's Firebag oil sands project that will eventually add output of 188,000 barrels of bitumen a day. The next three stages would follow the $3.6-billion completion of phase three expansion now being built and scheduled to be in service next year, Suncor said yesterday.

The Conference Board said the investment boom will result in increasing cost pressures, which will squeeze profit margins in the capital-intensive industry. Over all, the industry cost for extracting oil dropped 25 per cent last year, as rigs were idled and projects delayed.

The recession took some steam out of an overheated labour market, but industry wages continued to grow last year.