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Petroleum News: Shares dip as costs escalate: Shares of leading oil sands players have taken a hit…

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EXTRACT: “Brian Straub, Shell’s senior vice president for oil sands, said the company wants to assure itself that “we can execute successfully … right now our focus is on mitigating the costs and risks.”

THE ARTICLE

Shares of leading oil sands players have taken a hit in the latest shake-up resulting from capital cost overruns.

Amir Arif, an analyst with Friedman Billings Ramsey, triggered a 2 percent drop in Suncor Energy shares July 10 by suggesting that investors “should be taking profits” because the risk of falling short-term oil prices along with cost inflation “mutes our near-term enthusiasm” for the oil sands.

Shares of Shell Canada and Western Oil Sands, partners in the Athabasca project, were trimmed a few days earlier when they disclosed that pressures on labor, equipment and materials could delay their expansions plans.

Western, a 20 percent partner, set off alarm bells when it estimated the first expansion phase, to boost production by 100,000 barrels per day to 255,000 bpd, could climb by 50 percent to C$11 billion, setting the stage for the full three-stage venture to rise from C$13.5 billion to above C$20 billion.

Shell has ordered project reviews

Shell, the 60 percent operator, although not ready to confirm that prediction, said it has ordered internal and external project reviews that would lead to a more detailed update by the end of July.

Brian Straub, Shell’s senior vice president for oil sands, said the company wants to assure itself that “we can execute successfully … right now our focus is on mitigating the costs and risks.”

Suncor has just embarked on regulatory hearings aimed at increasing production from 260,000 bpd to 350,000 bpd by 2008 as part of an overall goal of reaching 500,000-550,000 bpd by 2010-12.

It was not overly troubled by the Friedman Billings Ramsey downgrade to “market perform” from “outperform,” describing the move as only modest and insisting it has learned enough from previous cost overruns to have confidence in its plan and its ability to deliver.

Front-end engineering continues

Shell and Western said the front-end engineering work for their expansion will continue, but a final decision to proceed with construction will not be made until the fourth quarter.

Western, which said it wanted to make the market aware of the potential for a cost overrun, said a year-long review of the 100,000 bpd expansion showed “very significant upward pressures on capital costs.”

Based on that it now anticipates capital spending will run to C$300 per annual barrel of production, up from the previous C$200.

Will Roach, chief executive officer at UTS Energy, a partner with Petro-Canada and Teck Cominco in the Fort Hills project, agreed that the whole industry is facing cost pressures, but the projects are “so long and with such large resources they can withstand fairly substantial capital intensity at the beginning.”

However, some analysts believe producers will have to either defer work or take a chance that oil prices will remain high, justifying higher capital costs in the oil sands.

Some are also urging companies to pool their efforts in a bid to curb overruns, following the lead of Canadian Natural Resources, which negotiated fixed price deals with contractors covering C$5.6 billion of the C$6.8 billion budgeted for the initial 110,000 bpd phase of the Horizon project.

—Gary Park

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