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Cut costs or face ‘death spiral,’ CNRL warns oil sands

Steve Laut in Calgary, Alberta, in this May 5, 2011, file photo.

TODD KOROL/REUTERS

The president of one of Canada's biggest oil and gas producers delivered a stern warning to the oil sands industry, telling a room full of Fort McMurray business people that they need to start cutting costs or the industry will fall into a "death spiral."

The "made in Fort McMurray cost" of doing business has risen too quickly and must end, Steve Laut of Canadian Natural Resources Ltd. told members of the local Chamber of Commerce.

Mr. Laut said oil sands producers were making three times the profit in 2004 when a barrel of oil cost about $40 (U.S.) than it did when the price hit close to $100 in 2013.

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He said rising costs from suppliers, and not world oil prices, were the reason that CNRL and others could no longer produce the profits it once did.

Mr. Laut expects oil to eventually settle in the $60 to $75 range but insisted that the oil sands can only avoid collapse if the people in the room – contractors and service industry representatives – begin cutting costs.

The price of oil has dropped 50 per cent, but Mr. Laut said his company is not looking for the equivalent cost cuts from its suppliers.

His own company and other oil sands producers will have to be more efficient and develop new technologies that lower production costs.

The drop in oil prices is an "opportunity" for every part of the industry to cut costs and eliminate inefficiencies that were allowed to creep in when business was booming.

Mr. Laut also said municipal taxes have become the fastest rising cost for CNRL, and that they must drop – a pointed message to the local government. And he urged the Alberta and federal governments to make the regulatory environment more "effective."

Mr. Laut said the American fracking industry has become the oil sands' biggest competitor by developing new technologies to bring down extraction costs. If nothing is done to bring down oil sands costs, he said, the industry could be doomed.

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But he added that the oil sands are a more durable and long-term investment, and that by seizing the moment and lowering costs, it could get back to a healthy return on investment.

Reaction to Mr. Laut's speech was muted. Many in attendance said they knew cuts would be coming, and appreciated the bluntness of the message.

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