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Two more oil sands projects hit with billion-dollar cost overruns TrueNorth Energy and OPTI Canada both disclose new forecasts stemming from labor shortage, weak Canadian dollar; Kyoto looms as next threat Gary Park PNA Canadian Correspondent
The new generation of oil sands operators in northern Alberta is facing a test of its belief as the projected costs of extracting billions of barrels of bitumen soar to stomach-churning levels.
TrueNorth Energy LP, a unit of U.S. private industrial giant Koch Industries Inc., and OPTI Canada Inc., a privately held subsidiary of Israeli-based Ormat Group of Companies, are the latest to be sideswiped by increased budget predictions.
TrueNorth, the 78 percent partner in the Fort Hills project, with UTS Energy Corp. of Calgary holding the remaining 22 percent, revealed March 14 that its price forecast has climbed to C$3.5 billion ($2.2 billion) from C$2.5 billion.
OPTI, which announced plans last October for a C$1.5 billion Long Lake project, is now facing a costs of C$2.3 billion.
But it’s not inexperience that leads to these revisions.
Suncor Energy Inc., the pioneer developer of the oil sands 35 years ago, has just completed its latest expansion at a cost of C$3.4 billion, 70 percent more than original estimates.
Shell Canada Ltd., in partnership with Western Oil Sands LP and Chevron Canada Ltd., is moving towards completion of its Athabasca project after swallowing a 33 percent hike in costs to C$5.2 billion. Economics less robust Dave Park, president and chief executive officer of TrueNorth, conceded the “economics are not as robust as they were C$1 billion ago. But the economics still work and we continue to move the project forward.”
He blamed the same shortage of labor that fuelled the cost overruns on other ventures, along with Canada’s weak dollar that boosts the price of U.S. materials such as steel.
An even bigger threat, Park warned, is the prospect that Canada will ratify the Kyoto Protocol. “That would have a material negative impact on our ability to get the project off the ground,” he said.
If the Alberta government’s projections are correct, the Kyoto costs could be about C$30 a ton for greenhouse gas emissions and that could add C$1 a barrel to operating costs, Park said.
He said the cost increases are “an overall industry issue, not a project-specific issue.” Reserves up On a more positive note, TrueNorth reported its reserves have been increased to 2.8 billion barrels from 2.4 billion, which could extend the operating life of Fort Hills to 40 years from 30 years.
The first phase of the project is expected to produce 95,000 barrels per day by 2005, for shipment to a Koch-owned refinery in Minnesota. The second phase is expected to see output double in 2008.
Park said he still expected to receive regulatory approval this summer from the Alberta Energy and Utilities Board, with construction target to start in the fall.
But the new costs jolted UTS, whose only asset is its interest in Fort Hills. Its shares plunged 25 percent on the Toronto Stock Exchange to C$1.61.
Leigh Cassidy, UTS chief financial officer, said his company was caught off guard by the estimates, yet is committed to sticking with the project. “It continues to make economic sense to proceed,” he said.
OPTI , which is in a 50-50 joint venture with Nexen Inc. (formerly Canadian Occidental Petroleum Ltd.), also announced its revised price projections March 14.
The 20,500-acre lease has 5 billion barrels of oil in place and is scheduled to come on stream in 2006 at 60,000 to 70,000 barrels per day, starting this year with a pilot project at 3,000 barrels per day to test a patented technology for upgrading bitumen. Population growth What if any impact these cost overruns will have on the near-term future of the oil sands is concern to the Fort McMurray area, which is the center of activity and Canada’s fastest growing city.
The population of Fort McMurray has soared to 70,000 from 34,000 in 1996,including 8,000 living in work camps and 2,800 contractors working on home building alone.
Bill Almdal, coordinator for the Region Issues Working Group in Fort McMurray, said the total of announced or planned oil sands projects is now C$86 billion by 2016, close to double his projections of a year ago.
But he cautioned that oil sands growth is far from guaranteed, especially if Kyoto is implemented.
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