Oil Sands Attracting Interest Due to High Crude Prices and Reserve Concerns

SHANGHAI (Interfax-China) -- With international crude prices at record high levels and concerns over conventional oil reserve depletion mounting, interest in developing oil sand resources is increasing, a senior official with Petro-Canada's [TSX:PCA; NYSE:PCZ] oil sands subsidiary told Interfax late last week.

Consensus that limited conventional oil reserves are left is driving interest in oil sand, mines of which can be productive for 30 years after coming online, Colin Cook, vice president of Petro-Canada's oil sands marketing and development department, said on the sidelines of an industry conference.

While the high oil prices being seen at the moment are certainly drawing attention to the alternative resource, what matters most to potential investors is the long-term price trend for crude oil over the next 30 years, Cook said.

Although exploration costs for oil sand is reasonable at around $10 per tonne, overall production costs for each barrel of bitumen, the resource in oil sand that can be processed by refineries as heavy oil, stays at highs of $40 to $50, Cook explained. Each tonne of oil sand contains 10% to 15% bitumen.

Wu Qing, director of China National Offshore Oil Corp.'s (CNOOC) [NYSE:CEO] oil and petrochemicals subsidiary, said one of the company's first refinery under development can only profit from processing oil sands-derived heavy oil when crude oil prices remain above $50 per barrel and cost and freight prices for bitumen are below $40 per barrel.

Located in southern Guangdong Province's Huizhou City, CNOOC's new refinery is the single most expensive refinery project in the the country, and will come online in September this year with an annual refining capacity of 12 million tonnes.

The refinery is capable of being completely fed with heavy oil and will be able to mix a maximum of 1.5 million tonnes of bitumen annually with conventional crude feedstock, according to Wu.

Canada boasts the world's largest oil sand reserves, and with 175 billion barrels in total, comes second only to Saudi Arabia. While the United States will remain the country's dominant destination for oil exports, it is actively building infrastructure to divert some of the resource to the Asia-Pacific market, which Canada is actually closer to than most Middle Eastern and West African countries, Cook said.

In addition to other smaller projects, development is underway on a gateway pipeline designed to transport 400,000 barrels a day of oil sand-derived resources from Alberta to Kitmat, a marine terminal in western British Columbia, from where it can be shipped by tankers to China as well as to other Asia-Pacific markets, Cook said. Kitmat is a deep water port able to facilitate very large crude carriers.

However, a PetroChina [NYSE:PTR] official publicly expressed discontent with the progress of the pipeline project last year, despite a memorandum of understanding signed between the Calgary-based Enbridge Inc. and PetroChina in April 2005.

Due to insufficient support from the Canadian government for the CAD 4 billion ($3.94 billion) pipeline project, its completion date has been pushed back from 2009 to an unspecific date between 2012 and 2014, the official said. The project's delay is believed to be associated with unresolved land disputes with aboriginal groups.