As the Canadian oil-sands hub of Fort McMurray, Alberta, battles to rebuild after wildfires that ripped through in May, the industry that made it a boomtown is contemplating the end of an era of rapid growth.

The wildfires, which roiled global crude markets by temporarily shutting off production of at least a million barrels of oil a day, added to the mounting woes of Canada's oil-sands producers. High costs, tighter regulations, and tougher competition from shale oil have turned the industry into one of the biggest casualties of a two-year-old swoon in oil prices.

"A lot of plans that were based on triple-digit oil prices in the $100s [per barrel] are having to be adjusted in this environment," said Murray Edwards, chairman of Canadian Natural Resources Ltd. "All of us are having to look at our models" to assess what makes sense at $50 a barrel, he said in an interview, adding that only the best projects will get built.

In a weak energy market, caution about spending has cast a pall over costly oil and gas projects around the world, such as Arctic drilling and deepwater wells. Canada's oil sands face even stiffer headwinds because they are one of the world's toughest to extract and most greenhouse-gas-intensive sources of crude.

Shale oil, meanwhile, has become much cheaper to produce and offers a faster payback on investment, thanks to technological advances such as hydraulic fracturing and horizontal well drilling.

Canadian Natural is building what might be one of the industry's last megaprojects: a 22.2 billion Canadian dollar (US$17 billion) strip mine called Horizon, on which it broke ground on more than a decade ago. The final phase will start up next year, boosting output to 250,000 barrels of crude a day. But that is just half the 500,000-barrel-a-day capacity originally envisioned for the mine.

Nearly two dozen oil-sands projects have been canceled or suspended. European multinationals have been among the quickest to reassess their exposure, including Royal Dutch Shell PLC, Statoil ASA of Norway and Total SA of France.

Last year, Total pulled the plug on a planned C$11 billion project, and it said in May that the move showcased its commitment to lower-cost, more environmentally sustainable development. "We decided to reduce our exposure in Canada's oil sands, which are particularly expensive to develop and operate," the company said in a report. The report added that to meet climate-change goals, "part of the world's fossil-fuel resources cannot be developed."

Such pullbacks haven't been good for Fort McMurray, which is home to many oil-sands workers and depends heavily on the industry. For nearly a decade it prospered as oil companies invested billions of dollars in the forests of northern Alberta, more than doubling the province's oil-sand output and contributing to a global glut that has depressed crude prices. The town, like the industry, was already feeling the pinch when the wildfires roared in May.

The Insurance Bureau of Canada estimated last week that rebuilding the town will cost $2.8 billion. Even then, business isn't likely to be booming anytime soon.

"The period of megaprojects and robust industry growth is behind us," Mark Ward, chief executive of Syncrude Canada Ltd., Canada's largest oil-sands producer, told the Fort McMurray Chamber of Commerce in April.

Mr. Ward's speech came just days before fire evacuations forced Syncrude, a unit of Suncor Energy Inc., to temporarily shut down two of its oil-sands mines.

Once a trio of new mines and a handful of smaller well sites reach full capacity over the next two to three years, oil-sands growth is expected to grind almost to a halt, based on publicly announced plans by producers.

The Canadian Association of Petroleum Producers recently cut its annual growth projection for a third year in a row after surveying its members, forecasting oil-sands output of 3.7 million barrels a day by 2030, up from current output of about 2.4 million. As recently as 2013, the group had forecast oil- sands production of 5.2 million barrels a day by then.

Exxon Mobil Corp. says it remains committed to oil-sands investments, but that future projects will have to compete for capital with its other businesses, which include shale-oil producer XTO Energy.

The company's Canadian unit completed construction last year on the second phase of Kearl, a giant oil-sands mine, after the first phase was plagued by cost overruns and delays. All told, the 220,000-barrel-a-day project took six years and cost C$22 billion, split between Exxon and local subsidiary Imperial Oil Ltd.

Four years ago, Imperial informed investors it was "on target" to reach maximum capacity at Kearl of as much as 345,000 barrels a day and start up a separate 80,000-barrel-a-day oil-sands project called Aspen by the turn of the decade.

Imperial CEO Rich Kruger who has expressed misgivings about an Alberta government plan to impose an industry-wide cap on oil-sands greenhouse-gas emissions, said that a third expansion phase at Kearl is off the table for now, and that a decision won't be made until next year at the earliest on Aspen. "Certainly the price environment will alter the views on the economic attractiveness" of any new oil sands investments, he told reporters in April.

Write to Chester Dawson at chester.dawson@wsj.com

 

(END) Dow Jones Newswires

July 10, 2016 21:45 ET (01:45 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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