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The Ottawa Citizen: First stage of Petro-Can oil sands project to hit $14.1B

Company aims to produce 140,000 barrels a day by 2012
Reuters: Published: Friday, June 29, 2007

CALGARY – The first phase of Petro-Canada’s Fort Hills oil sands project in Alberta is expected to cost $14.1 billion, an amount the company hopes to keep in check by staggering the start-up of the project’s various parts, it said yesterday.

Petro-Canada and its Fort Hills partners are wrestling with a tight labour supply in Alberta and surging materials costs as the world’s oil industry rushes to develop the oil sands.

The initial phase of the mining and synthetic crude project, to be located at two sites, will produce 140,000 barrels a day of refinery-ready oil by the second quarter of 2012. A second stage will lift output to 280,000 by 2014.

The partners’ all-in costs for both phases could hit more than $26 billion.

Investors had been anticipating the cost estimate and design plan for months as the company agonized over ways to avoid the big delays and cost overruns that have plagued the oil sands industry.

“It’s a big number in and of itself, but on a capital intensity measurement I think it’s quite a comfortable number,” FirstEnergy Capital Corp. analyst Mark Friesen said.

The cost of the first phase equates to about $100,000 per barrel a day of production, in the mid-range of previous expectations and in line with a current expansion of Royal Dutch Shell Plc’s nearby Athabasca development.

Petro-Canada is operator of Fort Hills and has a 55-per-cent stake in it. Its partners are Teck Cominco Ltd. with 15 per cent, and UTS Energy Corp. with 30 per cent.

Alberta’s oil sands rival Saudi Arabia’s conventional reserves in size, but are far more expensive to develop.

More than $100 billion worth of projects are under way or planned as oil companies race to grab a piece of one of the few huge resource opportunities in a politically stable country.

Fort Hills construction will peak around the end of the decade, about the time demand for heavy building trades in Alberta is projected to be at its height at nearly 40,000 workers.

“We’re up against some tough competition and this is the picture that keeps me awake at night,” said Neil Camarta, head of Petro-Canada’s oil sands division. “But we’ve put a lot of thought into how to manage around this.”

The partners aim to start selling 160,000 barrels a day of raw bitumen from the Fort Hills mine north of Fort McMurray, Alberta, in late 2011. They would complete the plant half a year later.

The upgrader will be near Edmonton, where Petro-Canada operates a refinery it is retooling to run oil sands-derived crude exclusively.

The staggered approach is aimed at preventing the two parts from competing with each other for tradespeople, Camarta said.

Also, the company could attract as much as half its work force from outside Alberta and even Canada, he said.

The price for the first phase does not include $1.1 billion worth of engineering work that will proceed for the next 12 months before the partners make a final decision on whether to go ahead with the project.

UBS Securities analyst Andrew Potter estimated an after-tax rate of return at 10 per cent for the first phase and 12 per cent for the second, based on a long-term $51 a barrel oil price.

“We believe these are competitive global returns on a risked basis,” he wrote in a research note.

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