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Imperial puts dent in crown Suspends production at Kearl oil sands project, compounding series of planning, delivery, operational kinks that inflated price tag Gary Park For Petroleum News
Imperial Oil has become Canada’s largest integrated oil company by following the lead of its ExxonMobil parent and acting only when it is certain all of the bases have been covered and refusing to run with the herd.
That has seen Imperial puzzle many industry observers by taking a measured, plodding approach to exploiting its resource wealth in the oil sands, Arctic and LNG sector.
But it’s not as if Imperial (now 70 percent owned by ExxonMobil) lacks a track record to defend its style.
The company was launched 134 years ago when 16 refiners in Ontario joined forces, launching a company that has generally functioned like a well-oiled machine, keeping itself out of the public limelight as much as possible.
All of which causes furrowed brows when its performance in bringing northern Alberta’s Kearl oil sands project into production is weighed against a problem-plagued history that has stretched over a decade.
If the troubles had been limited to a couple of budget overruns that pushed the final bill from about C$8.9 billion to C$12.9 billion it would merely have placed Imperial among the ranks of other oil sands developers where, in fact, overruns of 50 percent and more were once common.
Equipment malfunction The latest setback for Kearl has been a head shaker for Imperial, which announced on Nov. 10 that it was shutting down operations for an unspecified number of weeks to tackle an equipment malfunction by replacing parts to correct unexplained vibrations in an ore crusher.
The company has offered no estimates of costs or anticipated lost production.
The reversal came right on the heels of the third-quarter results which credited Kearl with making a major contribution to a 45 percent year-over-year jump in profits to C$936 million.
Output from the operation averaged 92,000 barrels per day - a solid showing, but still short of the targeted 110,000 bpd, reflecting Imperial’s continuing struggles to overcome bugs in the system more than a year after Kearl was brought on-stream.
Chief Executive Officer Rich Kruger said in April that the challenges have included manufacturing and installation-related defects on some of more than 8,000 valves that regulate fluid flow and hydraulics.
Early cost overruns Just getting to the startup point was plagued by cost overruns and delays related to processing modules that were at the center of Kearl’s highest-profile problem.
Original plans to ship the units along United States highways to Alberta encountered a public backlash, and court rulings in Montana and Idaho, forcing Imperial to reduce the modules to even smaller components, which Kruger said “certainly didn’t help” achieve the planned production ramp up.
“It’s like taking a high performance sports car, cutting it in half, and then moving it a few miles down the road and trying to reassemble it,” he told reporters in New York last April.
Kruger said the defects should not signal long-term concerns over Kearl, taking the pragmatic view that “if something doesn’t work you’ve got to replace it or repair it.”
Doubling capacity Imperial is also holding out hope that its second phase, which will double capacity, should start producing in 2015 and pull operating costs below the $30 a barrel in the initial phase, although that performance is sharply above the $20 a barrel some analysts had expected in the near-term.
There has been little talk lately around Imperial’s original goal of a three-phase development to achieve 330,000 bpd, which was raised to 345,000 bpd by 2020.
However, the company website still lists the 345,000 bpd goal, which it hopes will be possible through future debottlenecking and presumably “learnings” from the first-stage experience.
(Kearl is owned 79 percent by Imperial and 29 percent by ExxonMobil, a partnership that has access to an estimated resource of 4.6 billion barrels, enough to support an operating life of 40 years.)
In contrast, oil sands powerhouse Suncor Energy is targeting operating costs for its $13.5 billion Fort Hills mine to land in the range of $20-$24 a barrel, with sustaining capital projected at $3 a barrel, compared with Kearl’s maintenance costs of $5-$10 a barrel, which the company has partly blamed on stricter tailings pond regulations imposed by Alberta’s energy regulator.
Output being tested Kruger said in April that about 22 refineries were testing Kearl’s output, including a handful of shipments to a refinery in Malaysia through Kinder Morgan’s Trans Mountain pipeline to the Pacific Coast.
He said that crude had been “well-received” in the market, noting that the refineries had experienced no operational hitches.
However, Kruger had delivered a veiled hint in spring 2013 that not all was going smoothly with Kearl when he urged reporters to keep in mind the “absolute scale” of the project, noting that adjustments were being made as the components were assembled.
“Nothing that it would describe as unusual or atypical,” he said, in what still amounted to a rare confession by Imperial that it was dealing with blips. “It’s just a big world-class project.”
Those comments were made less than two months after Kruger occupied the company’s top job, causing some analysts such as Michael Dunn of FirstEnergy Capital to wonder whether the change was related to cost overruns at Kearl.
Reconfiguring in 2010 Roll the clock back to late 2010 when Imperial announced that after two and a half years of construction it was reconfiguring the project to minimize facility requirements and potentially reduce the plant’s footprint.
The rumblings of discontent caused Kruger’s predecessor Bruce March to fire back in March 2012 at those pointing fingers at Kearl’s rising costs, saying time would tell who had the best project.
“I can’t comment on what any other competitor is looking at and I wish they wouldn’t comment about what we’re doing,” he said in a rare flash of peevishness from Imperial.
“We’ll see where the other competitors come out. I’m just as anxious as you maybe to see where they go.”
March was provoked by Suncor’s former Chief Executive Officer Rick George, who put himself in the unusual role of critic when he said some of the numbers at Kearl “look extremely high. They look really way out of range.”
“Our current estimates are significantly below those they’ve announced,” George said, referring to the newly established partnership with France’s Total to build two new mines with combined output of 260,000 bpd and a plant to upgrade 300,000 bpd of crude bitumen.
Who was right and who was wrong is unlikely to ever be resolved now that one of the Suncor/Total mines has been cancelled and the other remains under a cloud, while the upgrader is on hold indefinitely.
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