The Wall Street Journal: Black-Gold Rush in Alberta: "Shell Canada Ltd., a unit of Royal Dutch Shell PLC, disclosed last month that it has boosted its cost projection for a proposed 100,000 barrel-a-day expansion of its Athabasca oil-sands mine by 80%, to 7.3 billion Canadian dollars (US$6.18 billion).": Thursday 15 Sept 2005

CALGARY, Alberta -- By briefly blasting oil prices above $70 a barrel, Hurricane Katrina may have blown away any lingering doubts among oil producers about the long-term profitability of multibillion-dollar projects in the vast oil sands of this western Canadian province.

The supply disruptions caused by the hurricane also may stoke further U.S. interest in the oil sands as a stable, long-term supply source.

The U.S. Department of Energy estimates that Canada's oil sands contain 174 billion barrels of recoverable reserves -- the world's second-largest oil resource behind Saudi Arabia. But soaring construction costs and high prices for natural gas, which is used in producing petroleum from the sticky sands, are driving up the break-even point for new developments under way or planned for the northern Alberta region.

BLACK SANDS OF CANADA   See a map of the three major oil sands regions in Alberta that are said to hold the world's largest petroleum reserves outside of Saudi Arabia.

Until recently, analysts estimated that such projects would be profitable as long as the price of crude was at least $25 a barrel.

Still, it is hard to imagine a scenario in which an oil-sands project wouldn't return a profit with crude at $40 a barrel, says FirstEnergy Capital Corp. analyst Steven Paget, an oil-sands specialist. The price of the benchmark light, sweet crude-oil futures contract rose $1.98 to $65.09 yesterday on the New York Mercantile Exchange, breaking a three-session streak of declines.

With $80 billion of projects under way or in the planning stages, industry participants forecast that production from the oil-sands region will nearly triple to 2.7 million barrels a day by 2015 from one million barrels a day last year. The U.S. consumes about 21 million barrels of oil a day.

Oil sands are a mixture of grit and a tar-like grade of crude oil known as bitumen. The deposits are either mined in massive open pits, or, if too deeply buried for surface-mining, are injected with steam to coax the viscous bitumen to flow into wells. The bitumen, in turn, is chemically processed to yield an oil grade known as synthetic light crude, a preferred oil-refinery feedstock that trades at a premium to most benchmarks, such as West Texas Intermediate or the Nymex futures.

Prices for natural gas -- the fuel most widely used to produce steam -- are about 45% higher in Alberta than a year ago.

Construction costs include labor, steel and heavy equipment. Shell Canada Ltd., a unit of Royal Dutch Shell PLC, disclosed last month that it has boosted its cost projection for a proposed 100,000 barrel-a-day expansion of its Athabasca oil-sands mine by 80%, to 7.3 billion Canadian dollars (US$6.18 billion).

Even so, the wave of development engulfing the forested oil-sands region has gathered so much momentum that some say it is unstoppable. "Really, there is no price scenario that could derail the oil sands, be it oil prices or natural-gas prices," says Greg Stringham, vice president of the Canadian Association of Petroleum Producers. Recent lofty natural-gas prices aren't sustainable long term, he argues.

Mr. Stringham estimates that the average cost of producing synthetic light crude from oil-sands deposits has risen to $22 to $25 a barrel from $13 to $18 a barrel about three years ago. His estimates include production from established oil-sands projects, which have lower costs than do new developments, in part because they don't face inflated construction costs.

Many oil-sands industry participants are projecting prices of $40 to $50 a barrel for West Texas crude for the long term. "It is very difficult to find anyone who will tell you the price will be lower than $40," says Juan Osuna, an oil-market analyst with Enbridge Inc., a Calgary pipeline and natural-gas distribution concern that has proposed several large oil-sands-related projects.

Mr. Osuna notes that pipeline companies, usually the most risk-averse players in the energy sector, have recently flocked to the oil sands. Enbridge's chief Canadian rivals Terasen Inc. and TransCanada Corp. also have proposed big pipeline projects to transport more crude oil from northern Alberta oil-sands projects to U.S. refining regions, or to Canada's Pacific coast for tanker shipment to western U.S. refineries or China. Just last month, Kinder Morgan Energy Partners LP, a large U.S. pipeline and energy-storage concern, offered $3.1 billion for Terasen. Terasen shareholders are scheduled to vote on the deal on Oct. 18.

Alberta doesn't have enough bitumen-processing capacity to convert all its oil-sands production into synthetic light crude, so a lot of bitumen must be transported to refiners elsewhere in Canada or the U.S. for processing. Mr. Osuna points to Alberta's short supply of diluent -- in the petroleum industry, a costly substance used to thin out sticky bitumen and allow it to flow through pipelines -- as another factor complicating efforts to ramp up production.

Mr. Stringham of the Canadian Association of Petroleum Producers says northern Alberta's tight labor market also could slow plans to expand production.

Oil-sands producers are working to overcome such challenges. Among other things, they have been throwing their support behind several of the proposed pipeline projects with promises to sign long-term contracts to ship oil. Some producers are testing new oil-sands extraction technology that would burn bitumen instead of natural gas to generate steam.

Write to Tamsin Carlisle at tamsin.carlisle@wsj.com