CALGARY, Alberta (Reuters) - Canada's once-burgeoning oil sands industry has had a reversal of fortune as the world financial crisis has instilled discipline in companies that just months ago were concerned only with growth.
And that has prompted a shake-out.
Growth at any cost was once the defining principle for planning projects in the northern Alberta oil sands, which offer the world's biggest oil reserves outside of Saudi Arabia but which are notoriously difficult to exploit because of the difficulty of wringing oil from sand.
But now the companies that are faring best in a difficult market are those that are showing spending and operational discipline.
"No one wants to see growth for growth's sake," said Garey Aitken, chief investment officer at Bissett Investment Management. "What's more important is that the growth is profitable."
With plunging oil prices, the profit outlook for the oil sands has become bleak. High costs for labor and materials have pummeled budgets, with some analysts suggesting that projects need prices north of $100 a barrel to earn a decent return.
Indeed, Petro-Canadasaid in September that the estimated cost of its 140,000 barrel per day Fort Hills oil sands project had soared by more than half in under a year, putting the price of the development at more than C$21 billion ($17.7 billion).
With oil prices now flirting with $60 a barrel, most of the industry has pulled back: cutting spending, canceling projects or delaying completion to rein in the gold rush mentality that had almost come to view costs as irrelevant when oil prices were on the rise.
"That just made no sense," said William Lacey, an analyst at FirstEnergy Capital. "And the companies that are getting penalized are the ones that are potentially doing just that."
Shares in all the companies in the Canadian oil sector have been punished in the market meltdown that stemmed from the financial crisis. But the drops have not been uniform.
The companies that have maintained fiscal discipline in their oil sands investments, avoided excessive debt and looked for low-cost solutions for processing the tar-like bitumen from the oil sands have fared best.
Year to date, the Toronto Stock Exchange's energy index has dropped by more than a third. But EnCana Corp , which abandoned plans to spin off its oil sands unit and has teamed up with ConocoPhillips in a joint-venture that combines two of the U.S. major's refineries with EnCana's oil sands production, has dropped just 7.1 percent.
Husky Energy Inc , which has a similar refining-oil sands joint venture with BP Plc , has fallen about 20 percent.
Canadian Natural Resources Ltd , which on Thursday announced big spending cuts and slowed expansion of its Horizon oil sands project, has also bettered the index, falling 14 percent over the calendar year.
At the bottom of the rankings are the small oil sands producers and the companies that are still relying on big-ticket projects for future growth.
Suncor Energy Inc , which last month delayed completion of a C$20.6 billion oil sands expansion for a year, to 2013, has dropped 46 percent over 2008. Petro-Canada is down 41 percent, while UTS Energy Corp , whose prime asset is a 20 percent stake in the Fort Hills project, has fallen 82 percent this year.
"Investors suddenly said 'This makes no sense'," Lacey said. "In this market, there's more discipline being forced upon" oil sands producers.
Big projects have suddenly become unfashionable in the oil sands, with just about every major project being delayed or deferred for better times.
While the region has a huge 173 billion barrels of bitumen in the ground, it's unlikely that production will reach current forecasts of 2.8 million barrels per day by 2015, more than double current output.
Even after markets recover, there are doubts that producers will again rush back to the region, planning multiple projects that compete for labor and materials and drive up costs.
"They will be more patient," Aitken said. "They're not going to go at such a frantic pace."