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Look up … way up Nexen, OPTI JV in labor crunch at Long Lake oil sands project; forced to delay startups, hike costs by another 10-15 percent Gary Park For Petroleum News
Canadian independent Nexen and technology innovator OPTI Canada are close to finding an answer to a question that has bedeviled civilization: How high is up?
The joint partners in the Long Lake oil sands project — the fourth integrated production and upgrading venture in Alberta — have been forced to pump more money into their budget as they enter the final stretch to completion of their first phase.
They now hope to hold costs to C$5.8 billion, up 10 percent from the most recent estimate, and just in case, they have made provision for a contingency that raises the final bills by 15 percent to C$6.1 billion.
Assuming they hold the line at C$5.8 billion, that is 70 percent above the estimated C$3.4 billion when construction was sanctioned in April 2004.
Since then they have raised the bar five times.
Andrew Potter, an analyst with UBS Securities, found the increase “rather surprising given how late in the project that this cost revision has occurred,” but he noted that OPTI, which has no current production, has funding in place to complete the first phase.
The end result is that Long Lake is in the same category as its oil sands peers, all of whom have swallowed hefty overruns in recent years as they struggled to hire skilled labor and buy materials.
In addition, Nexen and OPTI have decided to delay startups to avoid dealing with harsh winter conditions as they introduce an upgrader, which will use pioneering technology to turn raw bitumen into synthetic crude.
OPTI Chief Executive Officer Sid Dykstra said “the dead of winter” is not a good time to be commissioning such a complex plant, even though it is about 90 percent complete.
About 40 percent of the latest cost increase is a direct result of extending the startup schedule.
The delays to this point have been largely pinned on a shortage of pipefitters needed to finish a sulfur recovery unit.
Long Lake Phase I is designed to extract 72,000 barrels per day of bitumen, using steam-assisted gravity drainage, and convert that into 58,500 bpd of premium synthetic crude.
But the delays and cost increases mean that the upgrader will produce its first premium synthetic crude in the second quarter of 2008 and reach its full production capacity 12 to 18 months later, as much as a year behind previous timelines.
However, Dykstra, who was disappointed with the delays and capital cost increases, said OPTI “feels pretty good” about meeting the revised budget — “any amount above that is unexpected contingencies” — and is “confident” the new timetable is realistic.
Nexen said the key risks include the completion of the sulfur recovery unit, access to labor, workforce productivity and the pace of commissioning activities.
Upgrader uses almost no gas The upgrader will use OPTI’s proprietary gasification technology, which virtually eliminates the use of natural gas by burning soot as fuel to generate the power and steam needed for bitumen extraction and processing.
Over the life of the project, Dykstra said oil prices averaging US$65 per barrel would yield earnings (before interest, taxes, depreciation and amortization) of C$1 billion a year over Long Lake’s 40-year operating life.
Nexen Chief Executive Officer Charlie Fischer said projected returns from Long Lake at current oil prices “are higher than expected at the time of sanctioning.”
Even so, Dykstra said sanctioning of Phase II — part of a four-stage development to achieve crude output of 240,000 bpd by 2016 — will not be possible until late 2008.
He said approval then will hinge on how the SAGD operation and the upgrader perform; the results of an Alberta government review of oil sands royalties, due for release by mid-September; and the details of federal and provincial greenhouse gas emissions regulations.
Without that information a “good cost estimate” is not possible, he said.
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