Royal Dutch Shell Plc .com: Shell Canada: Oil sands project faces higher costs

From MarketWatch

(Updates with Western Oil Sands’s estimate for higher cost; adds details throughout.)
CALGARY (MarketWatch) — Shell Canada’s (SHC.T) C$7.3 billion ($6.57 billion) plan to expand its 155,000 barrel-a-day Athabasca Oil Sands Project, or AOSP, could cost 50% more than previously expected, according to one of the companies involved in the project.

In a press release, Western Oil Sands (WTO.T), which owns a 20% stake in the AOSP, said that “preliminary estimates indicate a potential increase in capital costs… of approximately 50% higher than those anticipated last year.”

The new estimate means the first expansion stage, which would increase the AOSP’s production by 100,000 b/d, could now cost C$10.95 billion, a far cry above the project’s original anticipated cost of C$4 billion. Shell Canada raised its estimate to C$7.3 billion in August 2005, citing increased steel, equipment and labor costs in Alberta.

In a separate press release, Shell Canada, Royal Dutch Shell’s (RDSA) Canadian unit, said that it has been reviewing the economics of its expansion plans in light of higher input costs, and that the project is now expected to cost more, although the review isn’t yet complete. “It is already clear that there has been significant upward pressure on capital costs of the project,” it said.

Shell Canada spokeswoman Janet Annesley wouldn’t say by how much costs had increased, only referring to the market as “heated”. She said that more details would be provided when the cost review is completed at the end of this month.

Shell Canada has also delayed a final investment decision for the project. While it had previously expected to receive regulatory approval for the expansion in the third quarter of 2006 and to make its final investment decision and begin construction then, those have now been pushed back until the fourth quarter.

While that delay is in part due to a slower regulatory schedule than expected, it’s also because of additional project reviews being carried out by Shell Canada, Annesley said. She added that first crude from the expansion is now expected in the fourth quarter of 2009 or the first quarter of 2010.

This isn’t the first time major projects operated by Anglo-Dutch oil major Royal Dutch Shell, or its subsidiaries, have overrun cost estimates. In 2005, Shell said that costs for its Sakhalin II natural gas project in Russia would be double the initially budgeted $10 billion.

Shell’s long-term goal for the AOSP is to bring the facility’s mining and upgrading capacity up to 500,000 b/d through further expansions.

Shell holds a 60% stake in the AOSP. Chevron Canada and Western Oil Sands Inc. each hold 20%.

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