Oil price slump undermines controversial tar sand projects

Plunging oil prices might have spelled bad news for renewable energy projects, but they are also undermining the commercial viability of some of the world's most carbon intensive energy projects.

With the price of a barrel of oil dropping from almost $150 (£103) last summer to around $41 (£28) a barrel yesterday, many of the oil giants are having second thoughts about multibillion-dollar investment programmes designed to extract oil from tar-soaked sands or shale deposits in North America.

According to a study undertaken by The Times, over $60bn worth of projects have been delayed in the past three months alone, while a number of planned projects have been shelved indefinitely.

The paper claimed that with the cost of oil production from some tar sands standing at around $70 a barrel, companies including Shell, Petro-Canada and SunCor have all decided to delay projects which could prove economically unviable.

Shell said in October that it was delaying a second expansion of its current oil sands project, while Petro-Canada has also put back construction of an upgrader for its $17 billion development in Fort Hills. Meanwhile, SunCor has reportedly delayed expansion at its Voyageur oil sands project by a year.

The delays have been welcomed by green groups, which have long argued that the energy used to extract oil from tar sands and shale make it the world's most carbon intensive fuel. Some estimates claim that the carbon footprint of oil extracted from such sites is between three and eight times higher than that of conventional oil.

Industry observers say that president-elect Barack Obama's plans for a US-wide carbon cap-and-trade has also increased the financial risk surrounding such carbon intensive projects.

The recent slowdown in new tar sands projects appears to bear out predictions made last year by a report from the Co-operative Group, which argued that the sector presents unacceptable risks from an investment, as well as an environmental, perspective.

The report argued that energy firms were making multibillion-dollar upfront investments in projects that would become increasingly commercially unattractive as governments move to impose tighter caps on carbon emissions.

In related news, Obama's proposed plan to effectively put a price on carbon emissions from the heaviest polluters has also already claimed its first success, after US energy giant Dynegy announced it is to scrap plans for six new coal-fired power plants, largely as a result of changing regulatory factors.

The company confirmed last week that it is to dissolve a joint venture with LS Power Associates that was formed in 2006 to build a new generation of coal-based power plants in Arkansas, Georgia, Iowa, Michigan and Nevada.

Bruce A. Williamson, chairman, president and chief executive of Dynegy, said that the case for entirely new coal-fired power plants had weakened significantly over the past two years. "Today, the development of new generation is increasingly marked by barriers to entry including external credit and regulatory factors that make development much more uncertain," he said.