Petro-Canada Postpones C$25.3 Billion Fort Hills Oil-Sands Mine

By Jim Polson

Nov. 17 (Bloomberg) -- Petro-Canada, the country's third- largest oil company, said it delayed to next year a decision whether to mine oil sands at the proposed C$25.3 billion ($20.6 billion) Fort Hills project in northeastern Alberta because of rising costs and falling oil prices.

Plans for an upgrader, which would convert the tar-like bitumen into oil suitable for refining, are on hold, the Calgary-based company said in a statement today. Petro-Canada and partners Teck Cominco Ltd. and UTS Energy Corp. said they're ``committed to retention of the leases'' and are in talks with the Alberta government on the current lease term.

Energy companies including Royal Dutch Shell Plc and EnCana Corp. are reducing plans to extract bitumen, the tar-like raw material used for crude, as oil prices plummet. Oil futures traded in New York have tumbled about 61 percent since July to a low of $54.67 a barrel on Nov. 13.

``We're giving ourselves some breathing room on the project schedule so we can take advantage of a softening market to reduce costs,'' Ron Brenneman, chief executive officer of Petro- Canada, said in the statement.

The total cost of the Fort Hills project was pegged at C$25.3 billion and the cost of the upgrader at C$10 billion to C$12.5 billion, UTS said in a statement on Nov. 5. Canadian oil sands are the world's biggest energy reserves outside Saudi Arabia, according to the Canadian Association of Petroleum Producers.

``The writing had been on the wall for the upgrader,'' said Jim Hall, who oversees about C$1 billion at Mawer Investment Management in Calgary, including 116,000 Petro-Canada shares. ``It would have been a marginal project at $120 or $130 oil, so at $60, it's a non-starter.''

Investments Cut

Brenneman had said on an Oct. 23 earnings conference call that the company may buy an upgrader rather than build one.

In June, the Canadian Association of Petroleum Producers said companies would spend C$126 billion over the next five years on pipelines, mines and upgrading plants as record oil prices made the Canadian reserves in Alberta lucrative. The figure has now been chopped to about C$80 billion, Greg Stringham, an association vice president, said in a Nov. 7 interview.

Teck has plunged 85 percent since July 11 on concern the Vancouver-based miner won't be able to repay $9.8 billion of debt used to finance last month's acquisition of Fording Canadian Coal Trust.

``Petro-Canada's partners don't have a lot of financial room to maneuver,'' Hall said.

Petro-Canada holds a 60 percent stake in the Fort Hills project, and Calgary-based UTS Energy and Teck each have 20 percent. The project had expected production of 280,000 barrels of crude a day by 2015.

Imperial Oil Ltd., about 70 percent-owned Exxon Mobil Corp., is Canada's largest oil company by 2007 sales, followed by EnCana.

(Petro-Canada will hold a conference call to discus the Fort Hills project at 10 a.m. New York time, accessible on the company Web site at http://www.petro- canada.ca/en/investors/93.aspx.)

To contact the reporter on this story: Jim Polson in New York at jpolson@bloomberg.net.