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Facilities at Canadian Natural Resources Limited's (CNRL) Primrose Lake oil sands project is seen near Cold Lake, Alberta August 8, 2013.

Dan Riedlhuber/Reuters

Oil sands companies, which have benefited from years of low natural gas prices, are once again facing rising costs as the commodity they need to fuel much of their operations becomes more expensive.

Increasing prices for natural gas hit hardest at projects that use steam to soften oil-rich bitumen deposits to the point where the bitumen can drain into wells from which it can be pumped to the surface. Natural gas is an unavoidable expense in these projects, because it is needed to heat water to create steam.

If the price of natural gas climbs by one dollar, operating costs per barrel for such projects jumps by about the same amount, experts say. Companies without extensive natural gas operations of their own feel the most pain. MEG Energy Corp., for example, lacks natural gas operations, while Suncor Energy Inc.'s oil sands operations far outstrip its natural gas business.

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On Friday, the May contract for natural gas traded at $4.62 (U.S.) per million British thermal units on the New York Mercantile Exchange, more than a dollar higher than levels reached last autumn and two dollars higher than lows hit in 2012. This comes as the U.S. Energy Information Administration last week said inventories of natural gas were at their lowest level in 11 years.

"It is something to keep an eye on," said Justin Bouchard, an analyst at Desjardins Group in Calgary. While a sustained rise in natural gas prices would pressure profit margins at some companies, he cautioned that prices would have to climb far higher to reach a point that would inflict serious damage.

If natural gas prices were to reach $8 per million British thermal units, then operating costs could climb by $5 or $6 per barrel, he said. On the futures market, investors are paying an average price of $4.33 for natural gas to be delivered in 2015 and $4.25 for 2016.

MEG Energy has two factors offsetting rising natural gas prices. It has a low so-called steam-to-oil ratio, meaning it needs less natural gas than some producers to create the amount of steam necessary to extract bitumen at its operations. Its steam-to-oil ratio clocked in at an average of 2.6 to 1 last year, according to its 2013 annual report.

In addition, the company runs a co-generation facility that produces both steam for its wells and electricity to power its plant site. It sells excess electricity back into the grid, offsetting costs.

For example, its average operating costs in 2013 totalled $13.62 per barrel of oil, with $4.62 of that tied to energy expenses. However, its power sales averaged $3.61 per barrel. As a result, its net operating costs per barrel rang in at $10.01, according to its annual report. In the fourth quarter, its energy costs climbed, but power sales dropped, and the net operating cost hit $11.22 per barrel. The company's steam-to-oil ratio climbed to 2.9 to 1 in the quarter, weighing on energy costs.

MEG believes it has "pretty small" exposure to natural gas prices. "We think that we've got the right pieces in place to manage it well," spokesman Brad Bellows said.

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Suncor's steam-to-oil ratio hit 3.3 at its Firebag operation in 2013, and 2.6 at MacKay River, according to its annual report. The company did not return a call seeking comment.

Smaller, lesser developed, oil sands outfits such as Southern Pacific Resources Corp. and Connacher Oil and Gas Ltd. are among those also at risk. Neither returned calls seeking comment.

A number of Canadian oil sands producers are protected from rising natural gas prices because they have their own natural gas operations. Cenovus Energy Inc., Canadian Natural Resources Ltd., Imperial Oil Ltd., and Husky Energy Inc. all enjoy this so-called natural hedge.

But even those without the natural hedge are doing well. Last year, natural gas prices may have been lower, but so too were oil prices. For the moment, stronger oil prices are outweighing the damage caused by today's natural gas prices.

"These producers would take the current environment any day over last year's environment," said Michael Dunn, vice-president of institutional research at FirstEnergy Corp. "Investors would be worried about this if they thought that there was a material way to go for natural gas prices up from here."

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