New Refinery? Not Happening.

Just weeks ago we observed the near implosion of a planned refinery in Canada's Newfoundland and Labrador province. That aspiring refiner has fended off its creditors for the time being, and is now off passing the hat in the Middle East and Asia.

Meanwhile, a company with no shortage of financial clout has pulled the plug on its own Canadian refinery plans.

Royal Dutch Shell's (NYSE: RDS-A  ) (NYSE: RDS-B  ) local subsidiary already operates a 72,000-barrel-per-day refinery in Sarnia, Ontario, a Michigan-bordering industrial hub that's also home to a Suncor (NYSE: SU  ) ethanol plant. But since 2006, the company has been considering a new refining facility with two or three times the capacity. The expansion was to provide an outlet for Shell's oil sands output, scheduled to ramp up to around 770,000 barrels a day over the next few years.

Last week, Shell announced that it's not proceeding with the project. The company cited "the current project execution environment, market conditions and the current inflationary pressures across the oil and gas industry" as points of consideration.

Project execution and inflationary issues go pretty much hand in hand. Material and labor shortages are jacking up costs, and making on-time project completion a major challenge. Those delays make projects even more expensive.

The only other Canada refinery plan that I'm aware of -- a joint undertaking by Irving Oil and BP (NYSE: BP  ) in New Brunswick -- has seen cost estimates balloon from $5 billion to $7 billion. That duo isn't expected to make an investment decision until next year, but if conditions remain tight, that project appears to have no future either.

What's looking much more likely is that integrated oil companies active in Alberta and independent refiners alike will follow the lead of BP and Marathon Oil (NYSE: MRO  ) . Both companies are proceeding with Midwestern refinery expansions that will increase oil sands processing capacity. This approach beats the vagaries of a new venture any day.

When it comes to integrated oil, Marathon is a Foolish favorite. The company sports a five-star rating in Motley Fool CAPS, our collective stock-picking system. See what other Fools have to say, or make your own call, right here.

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Fool contributor Toby Shute doesn't have a position in any company mentioned. There are no vagaries to the Motley Fool's disclosure policy.


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