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$100 oil puts a new shine on Alberta

DAVID PARKINSON

Wednesday, January 02, 2008

Deepening nervousness over long-term global energy supplies will put Canada's rich oil sands even more in the global energy spotlight, economists said Wednesday as crude touched $100 (U.S.) a barrel for the first time.

Observers said the high development and production costs associated with the massive, complex Athabasca oil sands deposit are becoming less of an obstacle to investors, both inside and outside Canada. At the same time, the underlying source of oil's unprecedented price climb — fears that new oil supplies are becoming fewer and harder to exploit, while demand from the developing world is growing rapidly — also points to the oil sands, the world's biggest largely untapped oil source.

"These levels are enough to make Canadian oil sands a lot more important as a focus of the global energy industry," said CIBC World Markets Inc. chief economist Jeff Rubin.

His comments came after oil prices vaulted to the once-unthinkable $100 a barrel plateau for the first time, fuelled by geopolitical turmoil, threats of supply disruptions, tight U.S. supplies and a falling U.S. dollar. The New York Mercantile Exchange's benchmark February crude contract hit exactly $100 for a single trade, at 12:10 p.m. EST, before backing away slightly to close at $99.62.

Mr. Rubin said that touching on $100 "for a nanosecond" isn't quite the same as establishing $100 as a sustainable midpoint in a trading range, which was what he had in mind in early 2005 when he first predicted crude would reach such heights. However, he believes oil is poised to move firmly into triple digits by the fourth quarter of 2008, "maybe sooner."

He called such price levels "a major validation" of the multibillion-dollar oil sands projects proposed over the next decade, and suggested they could also trigger a wave of international takeovers of Canadian companies with a strong foothold in the oil sands.

"I think what we saw from Shell is a harbinger of what we can expect to see in the Canadian oil patch in the next couple of year," he said.

Royal Dutch Shell PLC's bought out publicly traded subsidiary Shell Canada Ltd. last year, one of the biggest players in the oil sands.

Despite soaring costs in Alberta's overheated energy economy, the continued high oil prices should keep other major producers interested in the oil sands, economists said.

"This is very good for the oil sands," said University of Calgary economist Frank Atkins, noting that total oil sands costs are running at about $50 a barrel.

While Mr. Atkins suggested that oil prices are overheated — he said the "equilibrium" price in the market should probably be more like $70 — markets have demonstrated in the past that "things can stay above the equilibrium for a long, long time."

So far, the impact of record oil prices have been muted for Canadian producers, especially in the oil sands, said André Plourde, head of the University of Alberta's economics department. Because oil sells internationally in U.S. dollars, the rising loonie has put a major dent in selling prices when converted into Canadian currency. Meanwhile, oil companies' costs that are paid in Canadian dollar have been rising. He added that prices for heavy oil haven't been keeping pace with the benchmark light crude traded on Nymex due to a lack of heavy-oil refining capacity and growing supplies, and that's the price that matters in the oil sands.

Ultimately, the growing scarcity of new reserves to exploit in other parts of the world, combined with growing energy nationalism in many countries, which has increased risk in investing in major projects, will essentially force major global oil companies to come to the oil sands, Mr. Rubin said. "I think they're going to be squeezed into these projects by what is happening in other parts of the world."

Economists said the high prices and relatively benign investing climate in Canada could also accelerate oil development in other parts of the country, including Saskatchewan, British Columbia and even Newfoundland and Labrador — despite Premier Danny Williams's reputation for playing hardball with big oil. "When you look at a world perspective, Mr. Williams looks a lot better than doing business with [Venezuelan President] Hugo Chavez or in Russia," Mr. Atkins said.

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