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The Edmonton Journal: Devon’s oilsands project costs jump by a third

Project to add output important for U.S. firm
Bloomberg: Thursday, November 09, 2006

Devon Energy Corp., the biggest independent oil and natural-gas producer in the U.S, said costs to double output at an Alberta oilsands project may be about a third higher than the initial stage.

Adding daily output of 35,000 barrels a day by 2011 at its Jackfish project may cost $600 million Cdn to $750 million, the Oklahoma City-based company said in a filing with Alberta regulators.

The first phase cost about $550 million, said Chris Seasons, president of Devon’s Canadian unit.

“We are seeing some inflationary pressures for sure,” Seasons said in a telephone interview. The new estimate is “quite broad. Will it capture it? I hope so but I’m not 100 per cent confident of that.”

Devon’s increased estimate reflects rising labour costs as high prices spark a boom in projects to extract oil from Alberta’s oilsands deposits, Seasons said.

Spending of as much as $125 billion by Devon and others such as Royal Dutch Shell Plc will almost triple output from the oilsands to 3 million barrels a day by 2015, Canadian regulators have said.

Increased pipeline capacity to U.S. refineries has boosted demand and prices for Canadian heavy-oil output, blunting the impact of inflation on oilsands projects, said Mark Friesen, an analyst with Calgary brokerage FirstEnergy Capital Corp. Heavy oil sells at a discount, or differential, to light oil, because it costs more to refine heavy oil into fuels such as gasoline.

The reduced discount may allow Devon to recover most of the expansion’s increased cost within a year, said Friesen, who rates Devon’s shares as “outperform” and owns none.

“Changes in the differential go a long way to offsetting the change in costs over the course of one year,” he said. “The rate of return probably improves in spite of the higher costs” because of the heavy-oil price differential.

Once regulatory approval is granted and cost estimates are finalized, Devon will consider sanctioning the expansion in 2007, Seasons said. The project could be deferred if rising costs mean the project won’t generate enough profit.

The expansion’s cost was pegged at $500 million in August 2005.

Each phase of Jackfish will develop recoverable reserves of more than 300 million barrels, he said. The project is located about 140 kilometres south of Fort McMurray.

Cost pressures on oilsands projects near Fort McMurray “are very, very high,” he said Tuesday. “Fort McMurray is like a world on its own.”

The first phase of Devon’s Jackfish is scheduled to begin production next year and reach capacity in 2008. Phase two aims to start construction in 2008 and production in 2010, according to an application submitted to Alberta’s energy regulator.

The two phases of Jackfish are expected to produce oil for several decades, according to the filing.

Devon’s daily output is equivalent to about 600,000 barrels of oil. Alberta’s oilsands deposits represent “a significant piece of our long-term strategy for the company,” Seasons said.

The decision to go ahead with projects like Jackfish isn’t “just based on one number,” he said. “Because of the context in which Devon is able to look at it and the range of metrics that they consider, it’s still an attractive project.”

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