Greg Weston: Oilsands crippled by soaring costs, memo says

A confidential government memorandum obtained by CBC News warns that soaring costs of developing the Alberta oilsands could put the brakes on the massive project, stalling one of the main engines of the Canadian economy.

The booming oilsands industry supports tens of thousands of Canadian jobs, and pumps billions of dollars a year into the national economy.

The memo written by Mark Corey, one of the highest-ranking officials in the federal Department of Natural Resources, warns that if the current trend of spiralling labour and other costs continues, investors may start to turn off the tap on the massive amounts of money needed to develop the oilsands.

"Although current crude prices promote oilsands development, ever-increasing capital and operating costs could make this price insufficient to support oilsands development at forecast levels," Corey writes.

Cost increases are currently "the biggest risk to investment in the sector," and could jeopardize the viability of some projects, he says.

Rising labour costs

The memo estimates that operating and capital costs to extract a barrel of oil from the tar-like sands have both more than doubled over the past decade.

It blames a chronic shortage of workers and resulting sky-high labour costs as the main cause of increased operating expenses.

Corey's memo reflects a growing concern inside government over the future of the oilsands, and specifically the massive amount of capital investment that will be needed to fuel their continued development.

Natural Resources Minister Joe Oliver recently estimated the oilsands would need $650 billion in capital investments in the next decade alonealmost five times what's been spent there over the past 50 years.

The memo written in April this year was obtained under the Access to Information Act and appears to have been prepared for Natural Resources Minister Joe Oliver.

The document pre-dates the Harper government's current review of foreign takeovers of two Canadian energy companies.

It nonetheless bolsters the contention of many in industry and government that Canada can hardly afford to turn away foreign investment in the oilsands.

State-owned suitors

The most contentious of the two proposed takeovers under review is an offer by the Chinese state-owned oil giant CNOOC to buy Calgary-based Nexen for $15.2 billion.

Nexen has been struggling to develop the Long Lake oilsands project in northern Alberta,where output isonly a fraction of what the company had promised investors.

Nexen owns two-thirds of the Long Lake project, and last year Chinas CNOOC bought the Canadian company that owned the other third of the enterprise when that firm went bankrupt.

CNOOC is promising to pump new capital into Long Lake, establish a new headquarters in Calgary, keep all Nexen's staff and management, list its shares on the Toronto exchange and fund research at a Canadian university.

Industry analysts say Nexen's future without a takeover is at best uncertain.

The CNOOC deal is only the latest in a string of Asian takeovers in the oilsands.

Sinopec, another state-owned Chinese company, spent more than $4 billion for a roughly eight per cent stake in the Syncrude Canada partnership, one of the two largest players in the oilsands.

CNOOC's takeover of Nexen would give the Chinese another seven per cent piece of the same Syncrude partnership.

Two other Chinese state corporationsPetroChina and China Investment Corp.have both made plays for smaller pieces of the oilsands.

Those deals have notattracted the political firestorm building around the CNOOC bid for Nexen.

Critics of government approval forthe deal, including a lot of Conservatives, are concerned it could open the floodgates to China buying up large swaths of the Alberta oilsands.

Indeed, the scenario described in Corey's memo to the ministernamely, soaring costs scaring off would-be oilsands investmentis giving Chinese companies the opportunity for a buying spree.

On the one hand, the rapidly increasing costs of mining the resource, and resulting decline in corporate profits, are driving down the stock prices of some Canadian energy companies to the point they are easy takeover targets.

On the other hand, CNOOC's interest in the Canadian oilsands is not all about profitChina is also shopping the world for guaranteed supplies of oil to fuel its exploding economic growth.

National security issue raised

Many critics of the CNOOC-Nexen deal say it should be blocked for security reasons alone.

Even the country's spy service has weighed in with warnings that allowing state-owned enterprises to take over Canadian natural resource companies may pose a threat to this countrys national security.

Public opinion polls show a majority of Canadians oppose the deal, including more than half of Albertans surveyed.

Pollster Nik Nanos: "On the one hand, you have the Canadian government wanting to do trade and business with the Chinese.

"And you ask average Canadians, and they say, 'Hold on. They are also a security threat, not just a business opportunity.'"

The Harper government is expected to make a final decision on the CNOOC-Nexen deal later this month.