Imperial Oil ponders major oil sands step

Drilling to establish reserves at multi-billion dollar project; concerned about cost

Gary Park

Petroleum News Calgary Correspondent

Imperial Oil is pushing a multi-billion dollar oil sands project to the next phase, but hesitating over a final decision until it has a better idea of the reserves available and the cost.

Canada’s largest integrated oil company will drill 200-250 wells this winter on its Kearl Lake leases to “size up the resource,” said Imperial Chief Executive Officer Tim Hearn.

“We think they’re high-quality leases and once we’ve got that in place, then I think we’re in a better situation to determine how we go forward,” he told a conference call.

Preliminary estimates have pointed to an operation yielding 200,000 barrels per day over 70 years from reserves of 1.7 billion barrels.

However, like all oil sands projects, Imperial is grappling with costs that could soar to C$8 billion from C$5 billion.

“I would hope it doesn’t cost C$8 billion,” Hearn said on a conference call. “That wouldn’t be my objective ... I think we would try to find something at the low end for the first phase.”

That could point to a phased development similar to those heavily favored by oil sands operators who are looking to manage their costs and use cash flow from each stage to fund the next, rather than be forced to swallow huge overruns.

The biggest single cost element for Kearl Lake could be a C$3 billion upgrader to convert raw bitumen into refinery-ready crude.

Senior Vice President K.C. Williams said the final cost is “highly dependent” on how Imperial does its upgrading.

Company has options for upgrading

Hearn said a tentative timetable includes filing regulatory applications in 2005, starting construction in 2007 and bringing the facility on stream by mid-2009 at 100,000 bpd.

“Our intention is to try and move it ahead in that kind of timeframe,” he said.

Imperial is already one of the most experienced oil sands players, with a 25 percent holding in the Syncrude Canada consortium and its own multi-stage Cold Lake heavy oil project that could reach 180,000 bpd by 2010, up from its current 130,000 bpd.

ExxonMobil Canada, wholly owned by ExxonMobil, has a lease adjacent to Kearl Lake where it has already done delineation drilling.

The prospect of a joint development is under discussion, with Imperial as overall operator for what Hearn said would be “more of a phased development.”

Conceding that Imperial does not know “whether there’s capacity to take all of what’s envisioned,” he said the incremental approach would allow the project to proceed in line with market demand.