Cost of Fort Hills oil sands project balloons

Calgary, Canada — The cost of the Fort Hills oil sands project has ballooned by more than 50 per cent above previous estimates, to as much as $23.8-billion, because of skyrocketing development costs, one of the partners says.
The first phase of the project — a mine 90 kilometres north of Fort McMurray, Alta., and an upgrader northeast of Edmonton — had been projected to cost $14.1-billion in a preliminary estimate released in June, 2007.

Now, Fort Hills is expected to cost $23.8-billion to build, with the mine part of the project costing $13.9-billion and the upgrader costing $9.9-billion, according to UTS Energy, which owns 20 per cent of the development.

In a separate press statement, the Fort Hills consortium – including UTS, operator and 60 per cent owner Petro-Canada, and Teck Cominco Ltd., which owns 20 per cent — said the project costs have increased “in the range of 50 per cent” and that they are assessing “a range of options to reduce or defer capital costs.”

“I remain completely confident that our partners are committed to this project,” UTS president and CEO Will Roach said on a conference call. “And we believe Fort Hills is an attractive project and it’s got great potential to create shareholders value, it’s a four-billion-barrel resource and in a mature stage of development.”

But the project “is sharing the same challenges in the same operating environment as all of our peers and competitors and this is an issue in terms of cost escalation that all of the resource companies are extantly facing on a worldwide basis, not just an Alberta basis.”

Petro-Canada chief executive officer Ron Brenneman said there has been “a dramatic rise in capital costs in the past year,” boosted by prices for construction materials, labour, project management and engineering. The companies said a definitive cost estimate and an investment decision are expected by year-end.

The first phase of the project, as currently conceived, would produce 140,000 barrels per day of synthetic crude oil. First bitumen production is projected for late 2011 and output from the upgrader would begin in mid-2012. The partners envision an expansion to 280,000 barrels per day by 2015.

UTS, which has a working interest of 20 per cent in Fort Hills, estimates that it will need to raise another $3.56-billion to fund its share of the development, on top of the $1.5-billion it has already raised. Options for raising that cash include new debt and equity issues, as well as the sale of other oil sands assets, Mr. Roach said.

“For UTS, this project is pretty robust still [with oil] at $80,” he said in a conference call. “The issue is getting the funding into the project in a non-dilutive fashion to the shareholder.”

The Fort Hills partners will now look at a range of options that would help get first production from the facility to market at an earlier date. One possibility is that the partnership looks at delaying the upgrader part of the project, Mr. Roach added.

Tristone Capital analyst Chris Feltin said the cost increases will be “particularly challenging” for UTS, and are indicative of the wider pressures facing the oil sands as a whole.

“The cost increase does not bode well for oil sands developers with projects yet to be completed,” he said in a research note. “This could see some projects put on hold until cost mitigation alternatives can be evaluated … The forecast production growth from Canada’s oils ands could continue to get ratcheted back.”

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