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February 2008

Vol. 13, No. 8 Week of February 24, 2008

Alberta: Trouble on the Horizon

By Gary Park

For Petroleum News

Canadian Natural Resources has experienced the equivalent of schoolyard piling-on in disclosing that the initial phase of its Horizon oil sands project could overshoot its latest budget by 28 percent or C$1.9 billion, climbing to C$8.7 billion.

The big independent took an instant pummeling from some observers, who delighted in pointing out that the company had long boasted of its “unmatched” ability to stick close to its original budget by avoiding the mistakes of its peers.

Its strategies to bring a high degree of cost certainty to Alberta’s inflationary environment have ranged from building an air strip at the site to rotate workers in and out, thus increasing its access to the labor pool in Quebec and Atlantic Canada; a broad-based labor strategy including signing on nonunion workers; and building modules in Edmonton and shipping them to northeastern Alberta, and locking in contracts worth C$5.3 billion of its estimated first-phase costs of C$6.8 billion.

The early results were so encouraging that Canadian Natural started talking about expanding Horizon to 500,000 barrels per day by 2017 from its initial 110,000 bpd and spending an additional C$20 billion to develop oil sands and heavy crude production of 800,000 bpd over 15 years.

By mid-2006 it was slightly ahead of time and under budget, but Real Doucet, senior vice president of oil sands, cautioned at the time that “it’s too early to say we’re going to be below budget for the whole project” — a concession that real cost pressures would occur in the final stages when the workforce climbed to 7,000 from 2,500.

A potent combination of extreme cold and lagging productivity hit about mid-January and the unfinished 5 to 10 percent of the project — “the most labor-intensive portion,” according to Doucet — lies ahead.

Company angry

But Canadian Natural has made no effort to disguise its anger with the turn of events. Chief Operating Officer Steve Laut told a conference call there would be immediate layoffs of underperforming workers to drive home the company’s resolve to reach the finish line on schedule and without any further hiccups.

Above all, Canadian Natural wants to avoid the pitfalls at the Long Lake joint venture by Nexen and OPTI Canada, where delays have hurt the share prices of both companies.

“We have chosen the best course of action,” Laut said. “We will meet the (third-quarter startup) schedule. That is in the cards and it will happen.”

Any more productivity setbacks and Horizon’s launch could be delayed from August to October or November, at which point all bets are off. An early winter at that stage could easily see the startup postponed to late winter or early spring 2009.

Canadian Natural underscored that worry by insisting its best option is to spend more money now and stay on track to take advantage of anticipated higher oil prices in late summer or early fall.

Horizon not hardest hit

But, despite budget adjustments in the past year and the company’s hopes of curbing spiraling costs, Horizon is by no means the hardest hit of the mega-projects.

The new budget translates into capital costs of C$79,000 per flowing barrel, compared with Petro-Canada’s latest estimate of C$100,000-$120,000 per flowing barrel for its Fort Hills project.

The growing list of those forced to swallow overruns includes: Shell’s Athabasca project 63 percent; Suncor Energy’s Millennium project 70 percent; Nexen-OPTI Canada’s Long Lake 79 percent; and Syncrude Canada’s Stage 3 expansion 105 percent.

The message Horizon reinforces is that projects will continually exceed budgets and “it’s going to be by a lot,” said analyst Andrew Martin, at Toronto-based Davis-Rea.






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