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Costs rising on Horizon Canadian Natural joins peers in swallowing dose of “over-run” medicine that could add C$2.5 billion to final costs, but expects go-ahead in early 2005 Gary Park Petroleum News Calgary Correspondent
The plans for Canada’s fourth full-scale oil sands project have been sucked into the financial muskeg country of northern Alberta.
Canadian Natural Resources — better known by its stock symbol CNQ — faces a possible C$2 billion hike in the budget for its 232,000 barrel per day Horizon project.
Sideswiped by rising steel, labor and fuel costs, CNQ said Nov. 3 that the three-stage development is expected to rise from an original C$8.5 billion to C$9.7 billion and could climb to C$10.5 billion in a worst-case scenario.
Company executives told analysts that the overruns include an extra C$500 million for steel from Korea, Japan and Italy, C$200 million for labor, C$200 million for design changes that CNQ believes will ultimately raise profits and C$50 million for higher fuel costs to strip the overburden at the site.
Although final corporate approval (government environmental and regulatory permission was granted last winter) will now be delayed by two to four months, Chief Operating Officer Steve Laut said a green light for the first stage of 113,000 bpd is anticipated in the first quarter of 2005, targeting mid-2008 for a production start, although Credit Suisse First Boston suggested that might be a “bit optimistic.” Peak output is scheduled for 2012.
Despite the cost setbacks, there was no hint from the executives that they are wavering on their commitment to join Syncrude Canada, Suncor Energy and Shell Canada in the oil sands big leagues. Employment will peak in 2006 The project is currently providing jobs for 282 CNQ employees and 450 contractors and will peak in 2006 at 4,500 trades people plus 1,500 supervisor and technical workers. On completion there will be 2,400 permanent mining and plant operating staff.
In its efforts to combat a squeeze on labor in the overheated Alberta economy, CNQ is building an airstrip near its site to fly laborers in from Venezuela (the only other country in the world with experience in oil sands-type production), India, China, Philippines, Hungary, Turkey and South Africa.
Laut said Horizon is “still very robust,” and Chairman Allan Markin described the project as a “legacy asset with a huge competitive advantage.”
“Rather than rush our approval, we will take our time to do it right,” Markin said.
So long as long-term WTI oil prices remain at US$28 per barrel, CNQ has projected a 15 percent return on capital and is confident that even if oil drops to US$14.50 it can remain profitable.
Laut said Horizon has a “huge amount of reserves behind it — 6 billion barrels that will last for 40 years, so we will just have a wall of cash coming at us.”
Wilf Gobert, vice-chairman of Peters & Co. in Calgary, said he is concerned about CNQ’s ability to finance the undertaking and its chances of attracting a partner.
Markin said CNQ is prepared to remain the 100 percent owner, but said discussions are taking place with a “lot of companies” who might be partners provided they “bring something to the table” other than just money. CNQ pursuing a variety of projects Already at the leading edge of Canada’s heavy oil producers, CNQ is pursuing a variety of other projects in northeastern Alberta.It is on track to start producing 30,000 bpd from its Primrose North facility in early 2006 — double that volume in 2009 — and innovative waterflood techniques are generating optimism that the 2.8 billion barrels of reserves at Pelican Lake are close to a commercial decision.
CNQ is also setting the pace in the development of three new oil sands blends that are more acceptable to U.S. Midwest refineries. It is currently selling 55,000 bpd to the Midwest and is aiming for 93,000 bpd by year’s end, close to half the total 200,000 bpd of blends being shipped from Canada.
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