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New oil sands horizon Canadian Natural takes measures to keep lid on budget for C$10.8B project; expects 15 percent return on capital when fully commissioned Gary Park Petroleum News Calgary Correspondent
Canadian Natural Resources has gone to greater lengths than any previous oil sands developer to stifle cost overruns in giving the final go-ahead to its C$10.8 billion Horizon venture.
John Langille, president of the Calgary-based independent, said Feb. 10 that although risk can’t be “completely eliminated,” four years and C$400 million have been invested in achieving a high degree of cost certainty.
In the process, the budget has been hiked from an original C$8.5 billion.
With access to an estimated 6 billion barrels of recoverable bitumen on 236,000 acres of leases, CNR anticipated a 40-year operating life, starting at 110,000 barrels per day in 2008 and building to 155,000 bpd in 2010 and 232,000 bpd in 2012.
CNR Chairman Allan Markin said the company has demanded “exceptional rigor” in the planning stages to ensure that Horizon does not compromise the conventional business.
“We are not willing to risk the company and its excellent prospects for one project,” he said. Cash flow essential for project financing In fact, CNR’s production, currently about 300,000 bpd of oil and natural gas liquids and 1.4 billion cubic feet of gas per day, are vital to the success of Horizon.
To ensure it has the cash flow to finance the project, CNR plans to hedge 75 percent and 30 percent of its crude production in 2005 and 2006 and 67 percent and 25 percent of its gas output over those same years.
When fully commissioned, Horizon’s operating costs have been projected at C$14 to C$14.25 a barrel and if WTI oil prices average $28 a barrel “free cash flow” will be C$1.6 billion a year — generating a 15 percent return on capital — rising to C$2.5 billion if long-term oil prices are $40 a barrel.
“The consistency of this cash flow will significantly change the risk profile of the company and when combined with our exceptional conventional oil and natural gas assets will transform Canadian Natural into one of the most sustainable energy companies in the world,” Markin said.
To keep a grip on the costs, the company has divided the C$6.8 billion first phase into 21 components, costing C$10 million to C$700 million.
So far, contracts covering C$2.2 billion have been awarded and the work force stands at 1,280. Another 2,000 will be hired over the next year and grow to a peak of 6,500. Non-union labor will be allowed A rarely used section of the Alberta labor code will allow CNR to hire non-union labor and negotiate a master agreement with one union that could apply to all.
Oil sands Senior Vice President Real Doucet said the company does not want to “give exclusivity to any contractors, nor to any union faction,” giving it the ability to draw from a wide labor pool and further help keep costs in check.
The exemption has raised the ire of union leaders, fearful that CNR would give preference to foreign workers — a prospect that was downplayed by Doucet, who insisted Albertans and Canadians would get first crack at jobs.
Going overseas would be “unlikely” because of the costs involved in flying workers to northern Alberta, although the project does include an airstrip capable of handling Boeing 737s to allow workers to spend more time with their families.
The company is now in discussions with TransCanada, Enbridge and Terasen to line up markets, including possible new outlets in Asia, California and the southern United States, as well as the traditional outlets in Canada and the U.S. Midwest.
CNR is also in the forefront of an initiative to blend heavy crude and light synthetic oil into a new cocktail that could displace imported high-sulfur crude in the Chicago refinery area.
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