CALGARY — A strained labour market in northern Alberta is taking a toll on Canada's oil patch, adding another $525-million to the cost of Canadian Natural Resources Ltd.'s oil sands project while prompting Imperial Oil Ltd. to push a decision on its construction plans into next year.
Canadian Natural, constrained by a lack of skilled workers, now sees its Horizon mine reaching full production by early next year, a delay of several months that will boost the cost of the project another 8 per cent to $9.27-billion.
That is 36 per cent higher than the original cost projection of $6.8-billion and an example of the kind of cost overruns that have become par for the course in the oil sands, as a host of companies with multibillion-dollar construction plans chase a limited pool of workers.
“The availability of contractors and I would say the lack of competition for people to bid on your project have had a more significant impact on cost increases than even we would have anticipated,” said Steve Laut, president of Canadian Natural.
“Every day longer it takes us to get on stream, that's another day of construction costs and operating costs.”
Indeed, the potential for oil sands costs to spiral higher is one factor that is leading Imperial Oil to take its time on a decision to start construction on its own $8-billion oil sands mine. Imperial had said a go-ahead decision on the Kearl project could come this year, but chief executive officer Bruce March told Bloomberg News the company will hold off on a ruling until early next year, giving it more time to figure out how to curb cost increases.
For Canadian Natural, the delay in reaching full production at Horizon stems from work on a hydrotreating plant that has fallen behind schedule. One of three such units in Horizon's upgrader complex, a hydrotreater reduces the sulphur content of oil sands crude, improving the value and quality of the oil.
Until the third hydrotreater is finished early next year, Canadian Natural believes it will still be able to produce nearly 70,000 barrels of oil a day within the next few months, or roughly 70 per cent of the plant's capacity of 110,000 b/d. Future plans for Horizon call for production to be increased to 232,000 b/d by 2011.
Royal Dutch Shell and Opti Canada Inc.'s joint venture with Nexen Inc. have also hit snags in construction close to the completion of their projects, causing last-minute delays and additional expenses.
Given the rocky experiences of other oil sands producers and recent worries among some investors that Horizon could be delayed by more than a few months, the announcement of a relatively short delay was greeted with some relief by the market, even in light of the cost overrun.
“You have all of this activity going on in the oil sands, and not all of it can come in on time and on budget … ,” said Lanny Pendill, an analyst at Edward James based in St. Louis. “Given that Canadian Natural was so close to being done and here we have a further announcement of cost increases – that is somewhat disappointing, but in the big picture it really doesn't make that much of a difference.”
Canadian Natural reported a second-quarter loss yesterday of $347-million or 65 cents a share, owing largely to unrealized hedging losses. That compares with a gain of $841-million or $1.56 in the same quarter a year ago. On an adjusted basis that doesn't include the hedging, it made $960-million or $1.78 a share, compared with $595-million or $1.10 a year ago. Cash flow came in at $1.859-billion or $3.44, compared with $1.513-billion or $2.81 a year ago.
Special to The Globe and Mail
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