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BP's oil spill in the Gulf of Mexico, the worst environmental disaster in U.S. history, is likely to push up production costs and oil prices and that may benefit Canada's oil sands, a report released Friday found.

The Deepwater Horizon disaster hasn't had much impact on the oil market so far, but is likely to have a significant influence on the offshore industry in the longer term as governments move to tighten regulations, TD Economics said in a report.

"The notion that oil sands are a safer method of production, plus the fact that production costs will rise once new regulations kick-in, could attract more investment into the industry, helping to boost the Canadian economy," the report said.

BP's chief executive Tony Hayward, appearing in front of U.S. lawmakers on Thursday, said he was "deeply sorry" for the April 20 accident, which is probably spilling about 35,000 barrels of oil a day into the sea. The lawmakers slammed the company for taking short cuts on safety to save time and money.

Currently, an offshore deepwater well needs an oil price of about $60 a barrel to break even, TD said. If increased regulation pushes up costs significantly the current oil prices, trading in a range of about $65 to $80, may not be high enough to justify further investment, it said.

The Obama administration currently has a six-month moratorium on offshore drilling below 500 feet and is not issuing any new permits while investigations into the Deepwater blowout continue.

The ban is unlikely to have an impact on 2010 oil production, but may cut supply going forward, TD said.

The International Energy Agency estimates that a one or two-year delay in new offshore drilling could cut output by as much as 300,000 barrels a day by 2015. That would equal out 5% of projected U.S. output.

The shortfall in supply may also benefit Canada in making a U.S. regulatory ban on exports from Canada's oil sands less likely, TD said.

While offshore drilling is continuing at present in Canada, the disaster is likely to make it much more difficult for potential projects in the Arctic to gain approval, it said.

Source: TorontoSun.com

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