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Mondaq.com: Major Capital Projects: Oil and Gas

The major focus of capital spending in the mining, oil and gas sectors continues to be the Alberta oil sands. Capital spending in the oil sands grew from $1.9 billion in 1997 to $6.2 billion in 2004 and continues to grow, with over $100 billion in projects scheduled over the next 20 years. The increasing cost of oil sands development has not deterred resource companies from making plans to expand existing projects. For example, Shell Canada Ltd., Chevron Canada Ltd. and Western Oil Sands L.P., owners of the Athabasca Oil Sands Project, recently announced a major plan for expansion. The first stage alone is projected at $10.4 billion.

In the offshore oil and gas sector, two projects off the coast of Newfoundland, the Terra Nova and Hibernia projects, are expected to attract approximately $400 to $500 million in new capital spending over the next few years.

A Closer Look: Shell and North West. The Alberta oil sands has already attracted vast sums of capital, and, over the past year and a half, an estimated $140 billion in future spending has been announced. Reported capital spending in 2004 topped $6 billion. A look at two particular projects, the Athabasca Oil Sands Project and the North West Upgrader Project, highlights two different strategies for success in this sector.

The Athabasca Oil Sands Project is an example of an “integrated approach” to oil sands development. This project, previously dubbed “one of the largest construction projects on the planet,” is a joint venture by Shell Canada Ltd. (60 per cent), Chevron Canada Ltd. (20 per cent) and Western Oil Sands L.P. (20 per cent). Using an “integrated approach,” capital spending is focused on building an integrated oil operation, which includes mining, upgrading, and refining components. The scope of the joint venture includes both the $1.8-billion Muskeg River mine in Fort McMurray, Alberta, and the $1.7 Scotford Upgrader near Fort Saskatchewan, Alberta. Upgraded bitumen is sold to Shell and Chevron refineries, with any excess sold to other refiners. An important feature of the joint venturers’ strategy involves entering into long-term agreements for the pipeline transport of raw materials between the two facilities and to market. The Athabasca Oil Sands Project currently produces 155,000 barrels of bitumen per day, with plans to increase to upwards of 550,000 barrels of bitumen per day.

In contrast to the “integrated approach” exemplified by the Athabasca Oil Sands Project, the North West Upgrader Project is an example of a more “focused approach” in oil sands investment. This project concentrates on one link in the production-supply chain, the upgrading of raw bitumen. The North West Upgrader Project will serve third-party producers by upgrading raw bitumen to light sweet crude oil before sending it to refineries for conversion to end products. The upgrader will be located in Sturgeon County, just north of Edmonton, Alberta. The capital cost of the first phase of the project is estimated at $2.4 billion and will allow the processing of 50,000 barrels of bitumen per day. Two more phases are planned by 2015, with an expected future capacity for the entire project of 150,000 barrels of bitumen per day.

These two projects represent two ends of the supply chain aggregation/disaggregation spectrum. The first allows Shell Canada and its partners with wide-ranging expertise in most aspects of the hydrocarbons industry to control and benefit from the full value chain. North West, on the other hand, brings its specific upgrading expertise to meet a market requirement in the upgrading niche of the value chain and hopes to draw capacity from independent bitumen producers without upgrading capabilities. In fact, North West recently announced a long-term contract with Canadian Natural Resources for feedstock.

Bennett Jones 3400 One First Canadian Place PO Box 130 Toronto Ontario M5X 1A4 CANADA Click Here for related articles (c) Mondaq Ltd, 2007 – Tel. +44 (0)20 8544 8300 – http://www.mondaq.com

Published: Jun 14, 2007

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