An 82 percent budget overrun costing C$3.3 million.
Enough to bring many projects to their knees? Not a chance.
Instead it scarcely raised a murmur of disapproval when operator Shell Canada put a price tag of C$7.3 billion on the next expansion phase at the Athabasca oil sands project, far ahead of the C$4 billion estimate set earlier this year by Western Oil Sands.
But Shell held out the promise that the ballooning cost will also help cushion the next two additions that it hopes will raise Athabasca from its current 155,000 barrels per day (which cost C$5.7 billion, overshooting the initial budget by C$1.9 billion) to 500,000 bpd.
Neil Carmata, the company’s senior vice president of oil sands, said that in addition to soaring labor, engineering and raw materials costs the higher budget includes a “strategic decision” to “pre-build infrastructure for future expansions.”
Upfront payments for final phases
In the process of boosting Athabasca by 100,000 bpd by 2010, the partners — Shell 60 percent, Western and Chevron Canada each 20 percent — are paying upfront for the final two expansion phases.
Among other things, when construction starts in 2006 they plan to install pipelines, add plant utilities and build worker camps now that will carry them through the later rounds.
The company said its deliberate decision to pay in advance for infrastructure will ensure the third and fourth stages are commensurately cheaper, although the final bill will exceed original projections.
It describes the approach as a “sausage factory” strategy, which means establishing an assembly line for building a multi-phase project.
The consortium also intends to revamp Shell’s Scotford upgrading refinery near Edmonton to handle more synthetic crude and less heavy oil.
Carmata said the upgrader is already operating at capacity and needs a capital infusion to avoid selling Athabasca production on the open market.
Expansion costs at C$200 per barrel
The revised budget will raise Athabasca’s expansion costs to C$200 per barrel of added annual production from C$100 forecast a few years ago.
Carmata said C$7.3 billion is actually a “very high number” and will lower Shell’s projected return on capital, but the partners made the disclosure now because of the industry’s cost trends that have created a “heated environment” worldwide with oil passing US$60 per barrel.
The upshot, he said, is that Shell is in a battle with not just other oil sands projects, but companies that are drilling conventional wells and building refineries around the globe.
But he said Athabasca, which has access to 6 billion barrels of recoverable bitumen, will not get out of line with the costs faced by its oil sands peers. Carmata is confident “we should be very competitive.”
Analysts gave a low-key response to the news. Terry Peters of Canaccord Capital said it is beneficial for Athabasca to be up and running with its first phase to help pay for the huge expansion costs.
Vince Lauerman, global energy analyst at the Canadian Energy Research Institute, said the sands sector can only attract further investment provided crude prices remain above US$30 a barrel, compared with US$20 only two years ago, but he doubts crude will slide back to US$30 any time soon.
