Royal Dutch Shell has become the latest oil company to halt development of Canada's formerly booming tar sands industry, amid soaring costs and plunging oil prices.

The Anglo-Dutch oil group said that it was deferring indefinitely an investment decision on the second expansion of its oil sands project near Fort McMurray, in Northern Alberta.

The announcement was made as Shell unveiled a 22 per cent surge in third-quarter profits to $8.45 billion (£5.13 billion), despite a fall in production, thanks to record oil prices during the three months to September 30.

Extracting crude from the bitumen-rich Athabasca sands of northern Canada is an energy-hungry, costly and environmentally controversial process that pays off only with high crude oil prices. Environmentalists welcomed the delays. Charlie Kronick, of Greenpeace, said the industry was risky not only because it requires high oil prices but because of a risk of international regulation of carbon emissions, which could undermine its rationale.

Although Shell said that it remains committed to the industry and continues to build operations able to produce 250,000 barrels of crude a day by 2010, it has chosen to delay a secondary expansion that would increase the total to 350,000 barrels per day.

Shell would not comment on the expansion's projected total cost, but Justin Bouchard, of the Raymond James brokerage in Calgary, estimated that it would cost C$13 billion to C$16 billion (up to £8 billion), to build new pipelines, new extraction plants and an enlarged bitumen upgrader in Scotford.

Jeroen van der Veer, Shell's chief executive, said that the decision had been taken because of “significant industry inflation and a tight labour market” in the Alberta region. “This final investment decision was originally planned for 2009, but we wait for costs to cool down before any new investment decision is made,” he said.

Shell's earlier, 100,000 barrels-a-day expansion phase was expected to cost at least £6.2 billion. Last year, the group spent £1.2 billion on oil sands projects. Shell has a 60 per cent stake in the project. Its partners, Marathon Oil and Chevron, have 20 per cent each.

Compounding concern about investment in the industry, Total, the French oil giant, said this week that its Surmont and Joslyn projects were economically attractive only with oil above $90 a barrel. Although Total insists that it remains committed to current projects, its spokesman would not rule out future delays.

Richard Savage, of Mirabaud, the Swiss bank, said: “It's a dilemma for the whole industry. People are having to re-evaluate their investments. The move in the oil price is creating a big cost squeeze.”

Banks were increasingly reluctant to lend to projects whose profitability relied on high oil prices, adding to debt-market pressure, Mr Savage said.

At an estimated 173 billion barrels, Alberta's oil sands are the world's second-largest oil reserve, behind Saudi Arabia, but producing oil from them requires complex production facilities and vast amounts of energy.

As oil plunged this week to a 17-month low of $61.30 a barrel, from a record high of $147.27 in July, mainly because of slumping demand as the global economy weakens, the industry's economics are looking strained.

Shell's bumper results were aided by one-off gains of $2.06 billion, mostly from sale of operations, but production figures were weaker than expected. Total production fell to 2.93 million barrels of oil and equivalents per day, from 3.14 million barrels a year earlier.

Shell's results were beaten by ExxonMobil, the world's biggest oil group, which unveiled a 58 per cent surge in third-quarter profits on soaring oil prices. Net income hit a quarterly record of $14.8 billion, but Exxon's oil production had its biggest fall in at least a decade. Liquids production was 2.29 million barrels a day, down 5 per cent from the same period last year.

Shifting sands

— Canada's oil sands industry is under pressure as high costs, plunging oil prices and turmoil in global financial markets trigger a wave of project delays

— This month alone, projects worth more than C$40 billion (£20 billion) have been postponed

— Petro-Canada, one of the largest players, is deferring a C$10 billion investment decision on a new bitumen processing plant

— Suncor Energy, another big player, is postponing by one year the construction of a C$20 billion upgrader plant, which turns bitumen into a more easily refinable, synthetic crude

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