Husky gets a grip on oil sands costs

Gary Park

Having watched many of its peers tumble down the seemingly bottomless oil sands pit, Husky Energy figures it has an answer.

The smallest of the five Canadian-based producing and refining companies, Husky is resolved to be the toughest on matters of cost control.

It announced two engineering contracts Aug. 31, which will put the onus on SNC-Lavalin Group of Montreal and PCL Construction Group of Edmonton to be responsible for general cost overruns on their portion of the C$500 million Tucker project. Any changes Husky makes go on its tab.

The two firms are expected to start construction work this fall on a C$290 million central processing unit, aiming for a late 2006 or early 2007 start-up.

Husky Chief Executive Officer John Lau said in a statement that the contracts with SNC-Lavalin and PCL make Tucker “one of the first oil sands projects to use a lump-sum turnkey project.” But it’s far from a first for SNC-Lavalin, which, among other similar deals, has recently completed turnkey projects at a C$480 million heavy oil facility in Venezuela and a C$650 million petrochemical plant in Montreal.

It is also preparing bids for Canadian Natural Resources’ C$8.5 billion Horizon oil sands project, which includes a first phase of C$5 billion, about 80 percent of which will be covered by lump-sum contracts.SNC-Lavalin said its answer is to make detailed plans prior to embarking on construction. How well the process works is important for Tucker, which is aiming for peak output of 30,000-35,000 barrels per day over 35 years from recoverable bitumen of 350 million barrels. It also sets the stage for Husky’s planned Sunrise oil sands project that could come on stream in 2008 and produce 200,000 bpd over 40 years from recoverable resources of 2.25 billion barrels.

The importance of the oil sands was underscored last month by Li Ka-shing, the Hong Kong billionaire who controls 72 percent of Husky through personal and family holdings.

He told an earnings briefing that Husky has billions of barrels of potential oil sands reserves from which it has “yet to book a profit.”