A LEADING investor in Canada’s bitumen deposits has given warning that runaway costs could jeopardise development of oil sands, casting doubt on the future of a resource that is one of the hottest spots in the global energy business.

The promise of billions of barrels of crude oil locked in tar sands, a resource compared to the oil reserves of Saudi Arabia, may be too costly to extract at the rates promised by some companies, according to Murray Edwards, vice-chairman of Canadian Natural Resources, a leading oil sands investor.

Royal Dutch Shell, ExxonMobil and Total plan multibillion-dollar investments in oil sands mining projects in northern Alberta, but soaring costs of labour, materials and the energy needed to turn bitumen into useable fuel are testing the economic viability of a business hailed as an answer to concern about dwindling reserves of conventional oil.

Speaking this week at a business forum in Banff, Mr Edwards said: “These projects, long term, need prices higher than US$50 per barrel.” The billionaire investor, who transformed a $100,000 (£52,000) investment into a stake worth more than $500 million today, reckons that some of Canadian Natural’s rivals will struggle to cope with costs that have doubled in five years. “What I am saying is the challenges of costs make you start wondering at what point projects are still economic,” he said.

The government of Alberta points to some 300 billion barrels of oil in the bitumen deposits that lie just below Alberta’s peat bogs, known as muskeg. What is recoverable depends on technology, which is rapidly improving, and costs, which are soaring. Canadian Natural’s Horizon project focuses on a lease over 115,000 acres of land north of Fort McMurray, the Alberta oil sands boomtown. The company hopes to produce 232,000 barrels per day by 2011 in a three-phase project costing C$10 billion (£4.7 billion).

Shell invested early in oil sands and is already producing 155,000 barrels per day from its Athabasca project at costs per barrel in the low twenty dollars range, but the group recently reconfirmed that it would go ahead with an expansion project that has suffered a cost explosion. Originally estimated at C$7.3 billion, the Athabasca expansion project is now expected to cost C$11 billion, according to Western Oil Sands, Shell’s partner.

Mr Edwards said that the oil sands industry needed high oil prices of $60 per barrel or more to sustain its growth. He said: “In the context of Canada and high oil prices, I would argue that if we did not have this we will not be able to complete the oil sands projects that are now under construction and some further projects. They just will not be economic.”

Shortages of skilled workers — such as welders and boilermakers and operators of heavy equipment — are sending the oil companies scouring the developing world for staff to work in the vast oil sands mining projects. Adding to the difficulty are a tough environment and short supplies of housing, schools and infrastructure.

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts