The Canadian Natural Resources oil sands upgrader at the Horizon oil sands facility near Fort McMurray, Alta.Larry MacDougal
Hurt once by scorching inflation in the oil sands, CNRL has dramatically reshuffled a multibillion-dollar plan to expand its Horizon project, tossing away firm schedules and vowing to proceed only if it can contain costs.
Rather than moving forward in several major steps as it expands from production of 110,000 to 250,000 barrels a day, the company has instead split its plans into dozens of smaller increments, each of which can be individually halted if costs begin to rise or labour comes into short supply.
The stability in crude prices for much of this year has fuelled a renewed industry-wide push into the oil sands, which suffered heavily in the post-2008 downturn. It has also brought new worries about a return to the pain of the last boom, which caused extreme labour shortages and added many billions of dollars to the cost of extracting oil sands bitumen.
Mindful of that, companies are taking new approaches in the oil sands, slowing developments and taking more control. Suncor Energy Inc. has paused its Voyageur upgrader and stretched out a decision on building its Fort Hills oil sands mine. Cenovus Energy Inc. is managing its own construction projects and assembling new components in a yard south of Edmonton. Imperial Oil Ltd. has reorganized construction schedules at its Kearl mine.
And companies have, like CNRL, broken their work projects into smaller chunks, which are easier to manage and less disruptive to cancel if costs soar again.
"If you're building a gigantic project, and you get stuck in the middle of a cost inflation phase, it's very damaging to your returns," said Canaccord Genuity analyst Philip Skolnick. "They're trying to prevent that."
On the first phase of Horizon, which saw its budget inflate by 43 per cent to $9.7-billion, "we saw that the smaller the projects, the more the engineering was completed, the better control we had on costs and the better execution we had in the field," CNQ president Steve Laut said in an interview Thursday.
Now the company is building on that strategy, splitting its growth plan over the next few years into five components and 46 individual projects, each of which can be frozen if needed.
"If the market gets hot and inflation takes off, we want to be able to say we're going to stop," he said.
Word of the new way forward serves as a sort of soft sanctioning for the Horizon expansion, which has yet to see a complete cost estimate and hasn't been officially announced, although Mr. Laut said some construction work should begin next year. If its plans aren't blocked by costs or labour problems, Horizon could reach 250,000 barrels of daily production capacity in the "2017 range," Mr. Laut said. "But we have no problems pushing that back if we don't get competitive bids from contractors to go forward."
The new construction schedule has several tangible benefits. Instead of the 10,000 workers that built the first phase of Horizon - or the 7,500 that were initially expected for the expansion - CNRL now intends to keep its labour force under 5,500 workers. And it will limit annual spending to between $2-billion and $2.5-billion per year.
Altogether, it has targeted a price for the new capacity of $90,000 to $100,000 per flowing barrel, which suggests an aggregate cost of between $12.6-billion and $14-billion - although BMO Nesbitt Burns analyst Randy Ollenberger said the figure is more likely to land nearer $11-billion. CNRL plans to complete its detailed cost estimates in the first quarter of 2011.
The company warned, however, that the cost of oil sands extraction remains so high that it is less profitable than other parts of its oil business.
"There is, I think, a myth out there, particularly with the public, that the oil sands are huge moneymakers and generate all kinds of returns," Mr. Laut said. "The truth is, they just barely get over our 15 per cent after-tax return criteria."
Still, one analyst said CNRL is suffering from its own decision to upgrade production, a decision necessitated by the technology it uses. Upgrading refines thick bitumen, which sells at a discount, into more free-flowing, lighter oil, which sells at benchmark oil prices. But CNRL is counting on a discount - or differential, as industry calls it - of 22 per cent going forward, when analysts calculate that upgraders aren't worth building until the discount hits 28 per cent.
Because of that, CNRL may be splitting out its Horizon plans in part to slow them down, in hopes that the differential will grow, the analyst said.
"If you're narrower than 28 per cent, it makes absolutely no sense to build upgrading. You're actually destroying net present value," the analyst said. "They have to, I think, push this out as far as they can while still showing that they're moving forward. And hopefully something changes in the meantime that makes the investment a slam-dunk."