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Tickers in this Article: MSFT, NYSE:BRK-A, CNQ, SU, NXY, CVX, MRO, STO, IMO, XOM
The visit to the Alberta oil sands by mega-billionaires Bill Gates, former Chairman of Microsoft (Nasdaq:MSFT) and Warren Buffett, the legendary investment guru in charge of the Berkshire Hathaway (NYSE:BRK.A) investment fund, set hearts a flutter in the Calgary oil patch last week, but follow-up comments quickly dashed any hopes that a deal was pending. Speculation that two of the world's richest men might be considering an investment in the oil sands prompted a jump in the price of oil sands stocks like Canadian Natural Resources (NYSE:CNQ), Suncor Energy (NYSE:SU) and Nexen (NYSE:NXY), but trading fizzled when Buffett disclosed in an interview on CNBC that he had no "buy order" pending on any oil sands stocks. He further added that the trip was just an attempt to get first hand knowledge of how the bitumen, which comprises the world's largest oil reserves outside of Saudi Arabia was actually being processed. (To learn more, read our Oil And Gas Industry Primer.)

While its early to conclude whether the trip and subsequent comments are either a thumbs-up, or down on the oil sands by these two tycoons, there is no doubt that a number of factors have, or will be having an impact on their assessment. Here we'll take a look at the factors that should be considered by any investor when considering the oil sands.

Production Forecast to Triple by 2015
Tapping into a vast energy resource that covers a land surface area roughly the size of the state of Florida, where weather conditions are among the harshest on earth, has not been without its challenges. However, the first phase of development, which primarily involves surface mining the raw bitumen and processing it through upgraders into light sweet crude, has managed to generate levels of daily production in excess of one million barrels per day, the vast majority of which come from just three facilities operated by Suncor, Syncrude Canada, and a consortium that includes Royal Dutch Shell (NYSE:RDS.B), Chevron (NYSE:CVX) and Marathon Oil (NYSE:MRO). By 2015, the Canadian oil industry estimates that production will nearly triple to 2.8 million barrels per day (bbl/d) as additional capital expenditures of more than $100 billion bring new projects on line.

Rising Costs are now Stalling Multiple Projects
However, it remains far from certain whether this new capacity will come into being, despite the recent rise in the price of oil. Recently, the Canadian Association of Petroleum Producers (CAPP) scaled its 2015 oil production forecast from 3.4 million to 2.8 million bbl/d noting that regulatory red tape and rising materials and labor costs could delay certain projects.

Back in 2006, Shell Canada shocked the industry when it announced that the cost of a 100,000-barrel-a-day expansion of its Athabasca oil sands development had nearly doubled to as much as C$12.8 billion. More recently, a whole slew of announcements regarding cost overruns and project delays have made news.

Canadian Natural Resource announced that the Horizon project cost, which was one of the sites visited during the Gates/Buffett junket, had jumped another 6% to C$9.3 billion, making it 36% pricier than the initial estimate back in 2004. Higher costs were also to blame on Norway's StatoilHydro (NYSE:STO) decision to push back its plans to build a bitumen upgrader by two years to 2016, and France's Total SA (NYSE:TOT) warned that regulatory delays may lengthen the schedule for its Joslyn oil sands project. In June, Petro-Canada (NYSE:PCZ) announced it was rethinking the design for an expansion of its MacKay River oil sands project due to surging costs for the steam-driven development. Company vice-president Andrew Stephens told reporters that Alberta's decision to increase royalty rates in 2009 also contributed to making the economics of the project "marginal". Imperial Oil (AMEX:IMO), which is 69% owned by Exxon Mobil (NYSE:XOM), also announced that it would be delaying its C$8 billion Kearl oil sands project by a year, to 2012, as it looks for ways to cut the project's costs.

All these delays are reflecting the fact that the fully integrated capital cost to build a 100,000 bbl/d oil sands production facility these days is now in the $10-11 billion dollar range. To put that in context, estimates to develop a 50,000 bbl/d first-of-its-kind oil shale retorting complex are in the $5-7 billion range.

The Bottom Line
If the cost gap between developing incremental oil sands capacity and new oil shale production narrows further, then we could eventually reach a tipping point where investment flows start being re-directed into oil shale, especially if the right government incentives come into the equation. The Bush administrations' recent call for Congress to lift restrictions on oil shale development on federal land could be the first step in the U.S. developing its own supplies of this type of hard to extract oil. The potential is just as enormous as the oil sands. Shale formations in the Green River area of Colorado, Utah and Wyoming hold an estimated 800 billion barrels of recoverable oil, and federal land comprises 72% of the total surface acreage. Maybe Bill and Warren have elected to take a wait-and-see attitude to see what opportunities develop on their side of the border.

For related reading, see Drilling For Big Tax Breaks to learn how oil and gas investments can provide unmatched deduction potential for accredited investors.

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