Royal Dutch Shell Plc  .com Rotating Header Image

Royal Dutch Shell Plc .com: Other firms feel Shell Canada’s oil-sands pain

FROM REUTERS
By Scott Haggett

CALGARY, Alberta, July 6 (Reuters) – Developers of northern Alberta’s huge oil-sands reserves may have to rework or delay their projects to avoid massive cost overruns, industry watchers said on Thursday, after Shell Canada Ltd. said expanding the Athabasca Oil Sands Project would cost billions of dollars more than earlier estimates.

Western Oil Sands Inc. , which owns 20 percent of Shell Canada’s oil sands project, said late on Wednesday that a planned expansion of the mine and upgrading refinery could cost close to C$11 billion, 50 percent more than estimated just a year ago.

The project, which will boost output by some 100,000 barrels a day to about 255,000, faces rising costs for labor, materials and equipment.

A spokeswoman said Shell Canada, 78 percent owned by Royal Dutch Shell Plc , is deferring a final decision on going ahead with the project until the fourth quarter instead of September as it firms up a budget.

But other operators in the oil-rich region may also need to rethink plans as costs rise across the board.

“They are going to have to find ways to get their costs down,” said Glenn MacNeill, chief investment officer at Sentry Select Capital Management in Toronto. “Clearly they can’t have these cost escalations continue and still be profitable.”

Some C$125 billion in projects are either planned or under construction in the Alberta oil sands, which contains an estimated 174 billion barrels of recoverable oil, a resource second in size only to Saudi Arabia’s reserves.

Shell Canada’s cost woes are expected to spread to other firms planning large-scale projects, and shares of smaller firms operating in the region plunged on word of the cost pressures.

Western Oil Sands shares dropped C$3.70, or 12 percent to C$28.41 on the Toronto Stock Exchange.

UTS Energy Corp. , a 30 percent owner of Petro-Canada’s planned 240,000 barrel a day Fort Hills oil sands project, fell 62 Canadian cents, or 10 per cent to C$5.45 on the Toronto Stock Exchange as more than 10 million shares traded, more than three times the three-month average volume.

However Will Roach, chief executive of UTS, said Fort Hills was unlikely to see the cost inflation suffered by Shell Canada, though a final estimate of costs won’t be ready until the fourth quarter.

“Are costs going down? Obviously not, but are we way off on our estimate? No. I don’t think it’s way off,” Roach said.

Out-of-control costs and a lack of skilled labor have been a prominent feature of nearly all major oil sands projects and the C$8.4 billion tally for a recent 100,000 barrel a day expansion of Syncrude Canada Ltd.’s mine and upgrading refinery was billions more than first estimates.

Canadian Natural Resources Ltd. , which is now building its Horizon oil sands mine and upgrading refinery, has kept costs in check by flying in labor from elsewhere in Canada and internationally.

But others companies, particularly those building their projects at the end of the decade, may face even greater competition to hire a work force from other major construction projects such as the 2010 Winter Olympics in Vancouver.

“The further along you are with these projects the better off you are,” said Martin Molyneaux. analyst at FirstEnergy Capital in Calgary. “The more theoretical the project, the less design work done, the more price risk you face. It’s not a pretty situation.”

($1=$1.11 Canadian)
 
© Reuters 2006. All rights reserved.

royaldutchshellplc.com and its sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

0 Comments on “Royal Dutch Shell Plc .com: Other firms feel Shell Canada’s oil-sands pain”

Leave a Comment

%d bloggers like this: