Wed Jan 21, 2009 5:04pm EST

CALGARY, Alberta, Jan 21 (Reuters) - Connacher Oil and Gas Ltd (CLL.TO) said on Wednesday it is resuming full output at its Alberta oil sands project after six weeks of curtailment because returns on the extra-heavy crude have improved.

Connacher said it expected to reach full production of 9,000 barrels a day from the steam-driven Great Divide project by the end of February. The company cut output back to 5,000 barrels a day when the operation became unprofitable.

A narrowing discount for oil sands-derived bitumen versus benchmark light oil, and sharply higher prices for crude delivered a few months down the road rather than right away, combined to allow the resumption, Connacher said.

It had been the first notable Canadian oil sands producer to chop production as oil prices tumbled to below $40 a barrel from a record in July above $147.

Connacher also suspended construction at its C$345 million ($274 million) Algar project, its second steam-driven oil sands development. It remains on hold, the company said Wednesday.

In such projects, companies pump steam into the earth to loosen up the gooey crude, allowing it to be pumped to the surface in wells.

To take advantage of the better economics for its crude production, Connacher signed a contract to lock in the improved heavy oil discount on some of its output, it said.

Connacher shares rose 4 Canadian cents, or 5.5 percent, to 76 Canadian cents on the Toronto Stock Exchange on Wednesday.

($1=$1.26 Canadian) (Reporting by Jeffrey Jones; editing by Peter Galloway)

Cheers; Scott