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Royal Dutch Shell Plc .com: Costs explode at Shell Canadian venture

From The Times July 07, 2006
By Carl Mortished, International Business Editor

 
SHELL is facing a cost explosion in the expansion of the Athabasca Oil Sands Project, a mining venture that extracts oil from bitumen deposits in the Canadian province of Alberta.

The first phase of expansion, intended to add 100,000 barrels daily to the current 155,000 barrel per day output was budgeted at C$7.3 billion (£3.6 billion) only a year ago. It is now expected to cost as much as C$11 billion, according to estimates published by Western Oil Sands, Shell’s partner in the project. 
 
Shell Canada said yesterday that it was conducting an assurance review of the project’s cost, pending a final investment decision later this year. Planned in three phases, the Athabasca expansion is intended to raise output to 500,000 bpd, and represents a large part of Shell’s oil production ambitions.

Shell admitted to “significant upward pressure on capital costs” but declined to confirm its partner’s prediction of a 50 per cent increase.

The Dutch oil giant is the leading player in an overheated market where the high price of steel, cement and a chronic shortage of skilled labour is weighing on investors. The tar-soaked sands of northern Alberta, reckoned to hold reserves as large as Saudi Arabia, are the oil industry’s hottest new property but the costs of operating in the harsh and remote environment of Northern Alberta are weighing on the industry.

The soaring price of crude oil set off a scramble for oil sands, a resource once ignored due to the high costs. However, the high price is rebounding on oil sands investors. “The high price of oil is a double-edged sword,” said a Shell Canada spokeswoman. “It leads to a heated marketplace and adds to input costs.”

The extraction of bitumen from sand requires heat and steam and the oil sands companies use vast amounts of natural gas to fuel their plant.

Opposition is mounting to oil sands expansions in Fort McMurray, a town at the centre of Alberta’s oil sands boom. The provincial government has been slow to respond to a massive influx of people into an area weak in infrastructure.
 

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