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Petroleum News: Beating the budget blues in Canada

Beating the budget blues in Canada

Nexen/OPTI Canada, Suncor, Canadian Natural Resources find ways to soften impact of higher costs, but none escape challenges

Gary Park

For Petroleum News

Some oil sands operators are scrambling to escape Canada’s high-cost environment; others see the challenge as an opportunity.

Imperial Oil and Husky Energy have already flagged their reluctance to proceed with upgraders in Alberta while labor and equipment costs soar.

Now Shell Canada has signaled its concerns by reviewing the economics of plans for building stage two of its Athabasca project, which have climbed from the C$7.3 billion forecast nine months ago, although the company is not yet talking about shelving the plans.

Chief Executive Officer Clive Mather told Shell Canada’s annual meeting April 28 the cost increases in all areas of the company’s business have prompted it to “look very hard at how we can mitigate those costs … and structure our projects to ensure their successful execution.”

In this disturbing environment, Nexen and OPTI Canada, partners in the Long Lake project, have decided to speed up expansion of the C$3.8 billion, 50-50 joint venture rather than lose construction labor and their place in the line-up for materials and equipment.

As they close in on completion of the first 60,000 barrels-per-day phase they are pushing ahead with new phases rather than taking a time-out.

Originally four-phase development

The original plan involved a four-phase development — two at Long Lake and one each at the Leismer and Cottonwood leases, targeting combined synthetic crude output of 240,000 bpd by 2016.

But OPTI has said it now favors seeking regulatory approval for a second and third phase at Long Lake, adding another 140,000 bpd of bitumen, although a final decision has yet to be made.

In the meantime, by accelerating planning and engineering work and limiting design changes, the partners expect to complete 30 percent of engineering work for the second phase by project sanctioning in 2008.

OPTI President and Chief Executive Officer Sid Dykstra said “the risk of material cost overrun is low” by taking this approach.

By retaining first-phase workers and doing the engineering work early, costs will be more certain at a time of unprecedented activity in the oil sands, OPTI said.

Even so, the partners concede that labor productivity has been 20 percent lower than expected, because of organizational problems and worker inexperience.

However, Nexen Chief Executive Officer Charlie Fischer said “we’re pretty pleased with where we are, given the pressure on labor.”

He said the joint venture is “getting ahead of the curve.”

“The limitation is really labor,” he said. “Canada is not a big country. You can probably only do about three of these developments at any one time.”

Nexen Chief Financial Officer Marvin Romanow said the world-wide demand for components is so fierce that Nexen can’t afford a break between phases.

Underpinning Dykstra’s optimism is the use of proprietary gasification technology developed by OPTI at Long Lake, which involves the burning of soot as fuel rather than natural gas to generate power and steam for the bitumen removal and processing.

The end result, OPTI hopes, will be a reduction in operating costs of C$18.20 per barrel over those who rely on gas.

Dykstra views gasification as a “step-change for oil sands development,” observing that the “best place to be is the lowest-cost producer.”

Other projects

Others have apparently come to the same conclusion:

• Canadian Natural Resources said its C$6.8 billion, first stage of the Horizon project is reaching milestones sooner than expected and within budget.

Senior Oil Sands Vice President Real Doucet said there will be challenges “due to the high level of activity” in Alberta and a strategic decision last fall to postpone awarding contracts.

But contract packages have been adjusted to better suit the marketplace and many have been issued that are closer to original budget projections.

Doucet cautioned that construction fuel costs have climbed C$44 million over estimates and those associated with diesel are up C$36 million, but neither has been sufficient to derail the budget.

• Suncor Energy is taking its own aggressive route in tackling inflationary pressures by trailblazing on the technology front, Chief Executive Officer Rick George told the company’s annual meeting.

“We’re not waiting for these technologies, we’re driving them,” he said.

One pilot project involves the use of mobile mining systems that could eliminate the need for massive trucks to carry bitumen from mines.

There is also emphasis on ways to lower natural gas consumption at steam-assisted gravity projects, including the injection of solvents into bitumen deposits and installing downhole pumps to aid the flow of the raw material, George said.

Suncor is also embarking on gasification by applying to the Alberta Energy and Utilities Board to build and run the industry’s first standalone petroleum coke gasifier with an upgrader that will raise Suncor production to 500,000 bpd.

George said gasification could slash the demand for gas by using an upgrading byproduct to generate energy and hydrogen, but a gasifier is not likely to be built before 2011.

As well, Suncor is part of an industry group examining a carbon dioxide pipeline system that would ship CO2 from oil sands upgraders to be injected in old oil reservoirs in central Alberta to rebuild pressures and aid enhanced recovery, he said.

Finally, George said Suncor is taking some of its manufacturing orders outside Alberta, although he conceded that inflation is not confined to the province alone.

“It’s in North America and in this industry across the world,” he told reporters.

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