Canadian oil sands boom escalating construction costs

By Jim Stott
Special OGJ Online Correspondent

CALGARY, Apr. 26 -- Shell Canada Ltd. says the cost of the upstream segment of a new oil sands project in northern Alberta could be up to 20% more than the original estimate of $1.8 billion (Can.).

The Athabasca Oilsands project in the Fort McMurray region will cost an estimated $5 billion, including the Muskeg River mine site and a pipeline to carry bitumen to an expanded Shell refinery upgrader at Scotford, near Edmonton.

Shell is lead partner in the project with 60%. Chevron Canada Resources Ltd. and Western Oil Sands Inc. each hold 20% in the venture, which is under construction and on schedule for completion and start-up in late 2002.

Shell said increasing regional and international construction activity in the oil and gas industry is resulting in upward cost pressures on the project. It said a detailed cost review of the Muskeg Mine and extraction facilities has now been completed and indicates the potential for a cost increase in the range of 20%, or $360 million over the original estimate. Factors include higher labor costs, the impact of detailed engineering definition, scope and design changes to improve operational reliability, and rising costs for materials and energy.

Shell said comprehensive efforts to mitigate the cost pressures and effectively execute both the upstream and downstream parts are continuing. It said the impact of these efforts and the potential for further changes to upstream and downstream costs will become clearer as activities reach peak levels and the labor environment adjusts to the expected completion of other industry projects later this year.

Meanwhile, Shell is standing by an estimate of a 10% cost increase in downstream components, based on a detailed review completed in 2000.

Shell said at the end of the first quarter that engineering was 76% complete at the mine site and 80% complete at the Scotford refinery upgrader site. Construction was 32% complete at the mine site and 17% complete at the Scotford site.

Other projects
Oil sands expansion projects by other companies in the Fort McMurray region have also experienced increased costs or have warned that they are a possibility.

The Syncrude Canada Ltd. consortium, the world's largest oil sands producer, recently completed its new Aurora mine, 22 miles north of its original Mildred Lake site. It said Aurora was completed within 10% of its original appropriated capital budget.

The group has now completed two stages of a planned four-stage, $8 billion expansion. Stage three will include a major expansion of the Mildred Lake upgrader and an additional production train at the Aurora Mine, both by the third quarter of 2004. Syncrude plans to double its capacity to 460,000 b/d by 2008 and account for 25% of Canadian crude production.

Suncor Energy Inc., Calgary, has completed 80% of its Project Millennium oil sands expansion and estimates project costs to date at $2.65 billion. The company said its cost estimate for the project remains unchanged at $2.8 billion.

However, it warned that construction cost pressures continue to challenge the project. It said construction productivity in the second quarter would be an important factor. Suncor expects to provide a final cost estimate early in the third quarter, when the project is expected to be more than 90% complete.

Oil sands production in the first quarter averaged 113,400 b/d compared with 114,800 b/d in first quarter 2000. Project Millennium is scheduled to increase Suncor oil production to 225,000 b/d by 2002.

The winding down of the project and the fact that oil sands projects are in different phases of development is expected to be a mitigating factor in the high demand for skilled labor, which is a contribution to increased costs.

Canada's National Energy Board recently estimated that all the oil sands projects currently on the drawing board, such as a $5.25 billion venture by Husky Energy Inc., have a value of about $34 billion, although it is unlikely that all projects will survive. It also estimated recoverable reserves in the western Canada oil sands at 308 billion bbl.

Even moderate uptick in estimated project costs will have a significant impact on corporate and industry finances.

Contact Jim Stott at [email protected]