UPDATE 3-Canadian Natural profit falls, to increase spending

* Q3 adj shr C$1.21 vs year-earlier C$1.78

* Horizon oil sands plant suffers operational problems

* 2010 spending set at C$3.9 bln, up 26 pct (Adds executive, analyst quotes)

By Jeffrey Jones

CALGARY, Alberta, Nov 5 (Reuters) - Canadian Natural Resources Ltd's (CNQ.TO: Quote, Profile, Research) third-quarter profit fell 77 percent as oil and gas prices tumbled and its oil sands plant was hit by operational problems, Canada's No. 2 independent oil explorer said on Thursday.

Still, Canadian Natural said it will boost capital spending by 26 percent to C$3.9 billion ($3.4 billion) in 2010, showing some optimism for industry fundamentals, especially crude oil.

The company plans to increase Canadian oil spending by 50 percent, taking advantage of strong markets for heavy crude by bolstering enhanced recovery at a few of its major plays.

But next year's budget still restricts spending in its natural gas business. The company said it expects gas output to fall by 12 percent as it cuts drilling by 18 percent due to lingering low prices and higher Alberta royalties.

"There's lots of supply out there, and our concern is that if we do get some increased prices there will be a very strong supply response and drive prices back down," President Steve Laut told Reuters. "We don't know for sure if that's going to happen, but it's a realistic expectation."