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Syncrude to tame natural gas costs in production

After reining in construction costs, Syncrude Canada vowed Monday to take control of another runaway expense -- natural gas.

The mammoth expansion underway at the Fort McMurray oilsands complex will likely end up within five per cent of the current $7.8-billion estimate, chief executive Charles Ruigrok said.

But gas is burning up 20 per cent of the plant's operating budget and steadily rising prices could make manufacturing the fuel from bitumen pay off, chief operating officer Jim Carter said.

The construction program made "good progress" since the Syncrude consortium disclosed in March a $2.1-billion, 37-per-cent cost increase, Ruigrok said. "There's nothing new to report on that front," he told a conference call on the plant's annual sustainability report.

The bitumen upgrader expansion, scheduled to raise the plant's production by about half to 350,000 barrels per day in 2006, will be nearly 50 per cent complete at the end of this month. About 5,500 construction workers are expected to have the project 70 per cent finished by the end of the year.

All 945 prefabricated "modules" or parts made in the Edmonton area have been delivered to the mining and bitumen processing complex 50 kilometres north of Fort McMurray. All but about 100 have been installed.

The project did not demonstrate a need for a $1.8-billion railway project, proposed last winter by Premier Ralph Klein and Athabasca Oil Sands Transportation Corp., to improve industrial shipping between Edmonton and Fort McMurray , Ruigrok said.

"The jury's still out on the railway," the Syncrude chief executive said.

Freight is a minor factor in costs of the expansion. Deliveries by road of the often-mammoth modules on jumbo trucks were "a relatively benign process" and one of the project's successes, Carter said.

Natural gas consumption is emerging as a Syncrude priority. The 4,000-employee operation pledged in its financial, environmental and social sustainability report to improve its energy efficiency and work on alternative fuel options.

Technology for extracting gas from bitumen has advanced, Carter said. "It wouldn't be more complex than what we're already doing ... it would really just entail capital investment to do it. That's driven by gas prices."

Energy costs at the Syncrude complex averaged $4.44 per barrel of production in 2003 or one-fifth of a total $21.07, which was a 24-per-cent increase compared to 2002 production costs of $17.05 a barrel.

Syncrude consumes about 150 million cubic feet of gas a day, or as much as a small city. The oilsands complex spent $350 million on gas in 2003 as the annual average price set on international markets hit $6.28 per gigajoule, up 66 per cent compared to $3.79 in 2002.

Measured by production volumes, Ruigrok said Syncrude is off to a strong start this year. The plant set a record 253,000 barrels per day in first-quarter 2004.

But Syncrude also set a target of reducing production costs by nearly 15 per cent to $18 per barrel to improve profits for owners Canadian Oil Sands, Imperial Oil, Petro-Canada, ConocoPhillips Canada, Mocal Energy, Nexen Inc. and Murphy Oil Co.

The target will only be hit if natural gas prices reverse direction by falling in the second half of this year to drag the 2004 annual average down to an average $5 per gigajoule, the Syncrude sustainability report said.

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