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Oil sands costs may rise 35%

CALGARY — Canadian Natural Resources says high prices for steel, fuel and labour could boost the cost of the first phase of its Horizon oil sands project in northern Alberta by nearly 35 per cent — to $6.6-billion.

Calgary-based Canadian Natural is just the latest energy company to experience escalating costs for major oil sands projects, but it still believes Horizon is economical even though its three phases could cost $2-billion more than planned.

“Horizon costs are definitely impacted by the rising costs of steel, the global demand for construction and high demand locally for construction labour,” chief operating officer Steve Laut told analysts Wednesday while detailing the company's 50 per cent increase in quarterly profit.

“Although the costs are higher than previous estimates . . . this project is still very robust,” said Mr. Laut.

Phase 1 of Horizon, 100 per cent owned by Canadian Natural, is scheduled to begin production by mid-2008 with production capacity of 110,000 barrels of bitumen per day. It includes an open-pit mine and upgrader to turn sandy bitumen into synthetic crude oil.

Revised estimates now peg the cost at about $6.1-billion, with a “contingency estimated risk” boosting costs to $6.6-billion. That's up from earlier estimates of about $4.9-billion.

The three phases of the project are now expected to cost about $9.7-billion, with contingency risks boosting estimated costs to $10.5-billion — up from $8.5-billion. The two extra phases are expected to more than double production to 232,000 barrels a day.

Still, Canadian Natural said the project continues to have a projected rate of return of 15 per cent based on a long-term oil price of $28 US a barrel. Currently, the price of oil is around $50 US.

When completed, the project's break-even oil price is a mere $14.50 US a barrel.

“It has a huge amount of reserves behind it — six-billion barrels of reserves that will last for 40 years, so we'll just have a wall of cash flow coming at us,” said Mr. Laut.

About 70 kilometres north of Fort McMurray, Alta., Horizon has large leases with an estimated 18-billion barrels of bitumen in place — about one-third recoverable with current technology.

While a decision to go ahead with Horizon is expected soon, the company said Wednesday that final sanctioning will be pushed back between two and four months as bids for parts of the project are still coming in.

Even though Canadian Natural has yet to fully sanction the project, it continues to prepare the site in northern Alberta. Nearly 300 company employees and 450 contractors are already employed at Horizon.

Horizon will be Canada's fourth major open-pit oil sands project, behind the Syncrude joint venture, Suncor Energy's project and a Shell Canada-operated plant that began production last year. All the projects have experienced massive cost overruns.

Canadian Natural also said Wednesday its third-quarter profits jumped more than 50 per cent to $311-million due to record-high production and global oil prices that increased about 45 per cent from last year.

Earnings for the quarter ended Sept. 30 amounted to $1.16 a share and compared with $201-million or 75 cents per share a year earlier, Canadian Natural reported.

Cash flow hit a record $1.04-billion, up from $758-million, while production of crude oil and natural gas liquids rose 20 per cent to 297,000 barrels a day.

“This was yet another milestone quarter for Canadian Natural as we continue to execute our defined growth plan, achieving record results,” said chairman Allan Markin.

“We have again set quarterly records for crude oil production and cash flow from operations and I believe that with our asset base, our strong track record of profitable growth is set to continue.”

Canadian Natural is one of Canada's largest independent energy producers with significant natural gas and heavy oil holdings. The company also has producing properties in the North Sea and is also developing a project off Ivory Coast in Africa.

The company also said Wednesday that former New Brunswick premier Frank McKenna had joined its board of directors.

Canadian Natural's shares fell nearly two per cent at the start of trading on the Toronto stock market Wednesday, but by early afternoon they were down just 32 cents, or 0.6 of a percentage point, to $49.55 in heavy trading of 2.2-million shares.

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