March 05, 2004 --- Vol. 10, No. 24March 2004

Flint Hills royalty oil contract approved by Legislature

The Alaska Senate unanimously approved the state’s new royalty oil contract with Flint Hills Resources March 3, the House unanimously concurred March 4 and sent the bill to the governor for his signature. Flint Hills is buying Williams’ assets in Alaska, including the North Pole refinery, and has said the purchase is contingent upon a royalty oil contract with the state.

The state negotiated a 10-year contract with Flint Hills allowing it to purchase up to 77,000 barrels per day at a contract price approximately 30 cents per barrel more than the state would receive for royalty taken by the lessees in-value.

Kevin Banks, Division of Oil and Gas petroleum market analyst, said in a fiscal note accompanying the bill that the contract price goes into effect as soon as the governor signs the bill. “Assuming passage by March 31,” Banks said, “an additional $2.1 million in revenues would be received in FY 04.”

Syncrude Canada soars to new overrun heights

The Alberta oil sands sector has taken another multi-billion-dollar setback, this time a record.

Syncrude Canada, the world’s largest producer of synthetic crude, has seen the costs of its current major expansion soar by C$3.7 billion — the biggest in the history of the oil sands — and lost at least a year’s production or about 36 million barrels.

Canadian Oil Sands Trust, which holds a 35.3 percent stake in the consortium, disclosed March 4 that the project to boost output by about 100,000 barrels per day to 350,000 bpd is now expected to cost C$7.8 billion (US$5.9 billion) and not come on stream until early 2006, a year behind schedule.

Cost estimates started at C$4.1 billion when the expansion was approved in 2001 and rose to C$5.7 billion in September 2002. The stunning announcement follows several years of oil sands overruns that have hit Syncrude, Suncor Energy and Shell Canada, the operators of the three mega-projects in northern Alberta.

Canadian Oil Sands Trust Chief Executive Officer Marcel Coutu blamed the “extremely” disappointing increases on delays in engineering work that stalled construction and project management. There was no criticism of the labor force that has ranged from 3,500 to 5,500 and now faces 10 million more hours of work than the 15 million that were projected. He warned there was a 50-50 chance of the final costs rising by another C$300 million.

Analysts were caught off guard by the disclosure.

Wilf Gobert, vice president at Peters & Co., said it was “rather stunning news,” and Barbara Betanski, with Desjardins Securities, said she was “quite surprised by the magnitude of the overruns.”

But Coutu said it was fortuitous that the setback occurred during a prolonged period of robust oil prices, which should help fund the expansion from cash flow.

Canadian Oil Sands Trust and Imperial, with a 25 percent stake, said they will cover their share of the overrun at C$700 million and C$500 million each.

“This is a larger number than the joint venture holders expected but we all remain committed to the project,” Coutu said. The other partners are ConocoPhillips Canada, Petro-Canada, Nexen, Mocal Energy and Murphy Oil.

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