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Petroleum News: Petro-Canada opts for caution: Neil Carmata on Shell Canada’s Athabasca cost overruns…

Won’t plunge into Fort Hills until it has a solid fix on budget; once you issue a price tag ‘you can’t wear an overrun’ says Carmata; cost estimate possible in early ’07, approval maybe in ’08

Gary Park
For Petroleum News
8 October 2006

One of the key strategic thinkers behind Petro-Canada’s plans to unlock the value of its 10 billion oil sands resource knows enough about the pain of dealing with project overruns to want no part of miscalculating the estimated cost of the integrated Fort Hills project.

Neil Carmata, who led the construction of Shell Canada’s Athabasca project and is now Petro-Canada’s senior vice president for oil sands, is unhesitating in his view that “if any new oil sands project deserves to go ahead” Fort Hills does.

The venture has Petro-Canada as operator with a 55 percent interest, UTS Energy holding 35 percent and mining giant Teck Cominco with 15 percent.

It has a resource conservatively estimated at 2.8 billion barrels and a goal of producing up to 370,000 barrels per day, starting at 190,000 bpd in 2011. Fort Hills is also a trigger for an upgrader, to turn bitumen into as much as 340,000 bpd of synthetic crude by 2015.

Estimates have run as high as C$19B

Budget numbers for the fully-integrated project have ranged as high as C$19 billion, based on the costs of rival operations, but Carmata repeatedly told an investor day seminar Oct. 4 that “we don’t have an estimate.”

“The important thing is to get the number right,” and if that extends the current tentative timetable Petro-Canada will take whatever time is needed, he said.

Reflecting on his experience with the Athabasca project — which overshot its start-up estimate by C$1.9 billion at C$5.7 billion, and has seen its first expansion phase climb from C$4 billion to C$10 billion-$12.8 billion — Carmata said “the moment you put out a price tag (for a project) you can’t wear an overrun.”

He said Fort Hills is “swimming against the tide of rising project costs” which have seen the construction of mining operations climb over the past decade from C$25,000 per flowing barrel to C$90,000-$110,000.

Carmata said Petro-Canada is “absolutely trying to get below those costs” as it chases a goal of double-digit returns.

Chief Executive Officer Ron Brenneman, underscoring his company’s determination not to rush decisions, said “some day this project will bring market to oil.”

Corporate approval could come in ‘08

The best the executives could offer was the hope of a cost estimate in early 2007 once front-end engineering is completed and corporate approval in 2008, which could delay the start of mining operations beyond 2011.
If it takes an extra six months or more, “so be it,” said Carmata. Once the cost is nailed down “you are stuck with it for 30, 40, 50 years.”

Noting he has “been to this movie before,” Carmata said the decision-making is no easier with oil at $60 per barrel than it was at $20 per barrel.

“If it was that easy everybody would do it,” he said.

For Carmata, the leading risk in the oil sands is the construction phase, not the start-up phase, which is often a time of breakdowns and other operational hitches.

Refinery plans also affected by cost crunch

The cost crunch is also affecting Petro-Canada’s plans to reconfigure its Edmonton refinery to exclusively process oil sands production, with current indications pointing to a C$400 million rise in estimates to C$2 billion.
The cost of Petro-Canada’s MacKay River thermal recovery project, which could reach 30,000 bpd by the end of 2006 and add another 40,000 bpd by 2010, is also facing a possible increase to C$1.2 billion from C$800 million.

To cut down on cost and greenhouse gas emissions as it seeks a role as one of the leading oil sands operators, Petro-Canada said it is working on new technologies to replace the use of natural gas.

They include the use of a propane solvent in place of steam to melt deeply buried bitumen deposits and a co-injection of steam and solvent to reduce gas-generated steam consumption.

Carmata said the results so far suggest Petro-Canada can find more energy-efficient and environmentally sustainable ways to develop its leases.

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