Petroleum News: Turning the inflationary corner

Suncor Energy CEO Rick George says industry may be “over the top” of the inflationary period; Athabasca project trio of Shell, Chevron, Western burdened with higher costs, pushes expansion; Nexen CEO says oil sands economic threshold $45 per barrel

Gary Park
For Petroleum News
Week of November 05, 2006

A rapid cooling in the North American house market and other industry slowdowns are not all bad news, especially in the Alberta oil sands sector.

Rick George, chief executive officer of bitumen pioneer Suncor Energy, said he has an “intuitive feeling … that we’re kind of over the top of this inflationary period” that has seen the costs of major projects balloon by 50 percent and more since the turn of the century.

“We’re starting to see some early signs of that intensity decreasing,” he told analysts Oct. 26.

George, whose company has had to swallow its own share of budget overruns, said steel prices have been easing, concrete is more available and the squeeze on construction labor is lifting.

“There are still some pressures on a cost basis, but we are probably through the worst part unless crude jumps to $100 a barrel or there is some other catastrophic event,” he said.

In addition to the continent-wide downturn in new housing starts, George said some industry pipelines and other projects have either been delayed or will be postponed, freeing up more labor for the oil sands.

But even those still wrestling with upward revisions in project costs show no signs of running for the hills.

Partnership signs to expand Athabasca project

A partnership of Shell Canada, Chevron Canada and Western Oil Sands, owners of that Athabasca project, have signed on to expand that operation by 100,000 barrels per day at a forecast cost of C$11 billion and are firming up arrangements for a new 100,000 bpd project.

Shell, as 60 percent operator, with Chevron and Western each holding 20 percent, have agreed to push ahead with plans to boost Athabasca output to 255,000 bpd by 2010-2012 on its way to an eventual 500,000 bpd.

The decision apparently shrugs off Shell Canada’s summer disclosure that the first-phase price tag would likely rise by 50 percent from about C$7.3 billion and the full three-stage undertaking could soar to C$20 billion from C$13.5 billion as a result of intense demand for labor, materials and equipment.

The capital spending will cover a new oil sands mining operation, which has already received Canadian and Alberta government approvals, and additions to Shell Canada’s capacity at its Scotford refinery near Edmonton, for which it expects regulatory clearance later this year.

Western Chief Executive Officer Jim Houck said the Athabasca expansion is an important step towards his company’s goal of increasing its oil sands production from 33,000 bpd to 150,000-200,000 bpd.

George Kirkland, Chevron’s executive vice president, upstream oil and gas, said the investment will “bolster our global effort to expand production. We will be actively working on other opportunities in the Canadians oil sands in the years ahead,” he said.

Shell takes up option for Ells River

In fact, the wheels are already turning in that direction, with Shell Canada’s board of directors taking up their 20 percent option for the Chevron Canada-led Ells River project. Western has yet to decide whether to exercise its 20 percent option. Ells River embraces five leases covering 75,000 acres, 24 miles northeast of the Athabasca operation.

It is estimated to have 7.5 billion barrels of oil in place, which would be exploited by in-situ extraction technology rather than the open pit mining used at Athabasca.

Chevron Canada, the 60 percent operator, started appraisal drilling last winter to evaluate the leases, which it hopes to turn into a 100,000 bpd operation by 2015.

Long Lake costs up $800 million

Regardless of George’s view that a dent is possible in inflation, there was another clear sign that the fallout could be a drag on projects well into the future.
The first-phase cost of the Nexen-OPTI Canada Long Lake venture has now been set at C$4.6 billion, a further rise from previous forecasts of C$3.8 billion and C$4.2 billion.

“We weren’t expecting pressures in the labor environment and the supply environment to be as strong as they were,” Chief Financial Officer Marvin Romanow told a conference call Oct. 25.

Long Lake is designed to produce 60,000 bpd of synthetic crude, with the start-up scheduled for late 2007.

Romanow noted that crude prices were $25-$30 per barrel when the joint-venture partners decided to commercialize their resources and had no thought that oil would soar to over $60, putting severe pressures on labor and supplies.

He said the fallout is likely to push costs even higher for the second phase which is targeting another 60,000 bpd by 2011. The ultimate goal for Long Lake is 240,000 bpd by late 2015.

Although Nexen Chief Executive Officer Charlie Fischer said in October that the oil sands economic threshold is $45 per barrel, Romanow was confident Long Lake remains “a very attractive and economic project. We believe commodity prices will be strong enough for us to make good returns and continue expanding our oil sands business.”

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