Imperial Oil, 69.6 percent owned by ExxonMobil, has long been recognized as the company that drives the hardest bargain in the Canadian oil patch.
In that context, it’s a fair bet that when Imperial (with ExxonMobil as a 29 percent partner) agrees to spend at least C$20 billion on a new Alberta oil sands development — and possibly C$29 billion according to one analyst — a lot of serious number-crunching has taken place.
But that’s what Imperial is prepared to fork over to build its Kearl mine and associated infrastructure to produce 290,000 barrels per day of bitumen from a lease of 4.6 billion barrels per day in northeastern Alberta.
And an undetermined additional amount could be spent on future debottlenecking to raise output to 345,000 bpd, the company said
It is all part of Imperial’s corporate goal of doubling its Canadian crude production to 600,000 bpd by 2020,including its 25 percent stake as operator of the Syncrude Canada consortium and additions to its in-situ thermal heavy oil operation at Cold Lake that currently yields about 140,000 bpd.
The Kearl project has faced down fierce opposition from environmentalists in Canada and from residents, conservation groups and local governments in Montana who have delayed the transport of modules from Idaho across the state and into Alberta.
Toughest battle with costs
The toughest battle, however, has been with rising capital costs, which are now estimated at C$6.20 per barrel, up from the previously announced C$5 — an increase company spokesman Pius Rolheiser linked more to changes in Kearl’s design and scope rather than the cost of labor and materials.
In reducing the project from three stages to two, Kearl is now targeted at 110,000 bpd by late 2012, growing to 145,000 bpd by the end of 2015 at a combined cost of C$10.9 billion, then moving over the next five years to a carbon-copy expansion of 145,000 bpd at an estimated C$8.9 billion.
As with any large asset which could have an operating life of 50 years, Kearl will also require sustaining capital.
Rolheiser said Kearl is a “vote of confidence in what we believe is a very high quality oil sands project” that could have an operating life of more than 50 years.
“The operation represents one of the best undeveloped deposits of mineable oil sands in Alberta,” he said. “The quality of the bitumen that can be produced is as good as, or better than, anything available in the industry today.”
New technologies
Rolheiser said Kearl will employ a “number of new technologies and innovations that will make it an outstanding project from a resource development and environmental perspective,” especially the handling of toxic mine tailings that has come under fire over recent years as one of the oil sands sector’s worst environmental blights.
He said Imperial is also “confident pipeline capacity will be in place” to handle Kearl production which will be sold before upgrading, but added Imperial, while endorsing TransCanada’s Keystone XL system to the Texas Gulf Coast or Enbridge’s proposed Northern Gateway pipeline from Alberta to a tanker terminal on the British Columbia coast, is not dependent on either project.
“We believe sufficient pipeline capacity will exist and will be developed to meet the needs of the Kearl project,” he said.
Jim Sandhar, an analyst with investment dealer Peters & Co., said the 24 percent hike in Kearl costs moves it into a pricey category of C$80,000 per flowing barrel and that could face another hike if cost inflation returns to the oil sands area.
He wrote that Peters & Co. has not set a total cost estimate of C$29 billion by incorporating higher anticipated spending on Phase 2 and the debottlenecking expansions and included spending on additional tailings requirements and pipeline infrastructure.
Tailings investment in 2015-20
Investment in tailings management will actually occur in the 2015-20 timeframe, while pipelines are “either current or prospective investments” to ship crude from the mine to the Edmonton hub, Rolheiser said.
The challenge of wrestling oil sands costs to the ground was evident in November when Imperial said an estimated C$15 billion, 250,000 bpd expansion of the Syncrude Canada operation by 2020 would stalled.
Imperial said it would instead concentrate on improving reliability at the mine-and-upgrader facility to first achieve design capacity of 350,000 bpd.
However, a planned expansion of Syncrude Canada’s 350,000 bpd facility has been stalled until operational problems are resolved.
Marcel Coutu, chief executive officer of Canadian Oil Sands Ltd., Syncrude’s largest stakeholder at 36.74 percent, said the new mine is unlikely to start production until the early 2020s.
He said unplanned outages of processing equipment in the third quarter show the plant has yet to overcome four years of missed production forecasts.
Of the other large mining proposals in the works, an environmental panel is currently reviewing Royal Dutch Shell’s expansion of its Jackpine operation by 100,000 bpd and France’s Total received regulatory approval earlier in December for its 100,000 bpd, C$9 billion Joslyn North operation.
—Gary Park
