Canadian Natural Resources Ltd. (CNQ) said a 50,000-barrel-a-day oil-sands plant backed by the Alberta government will cost C$8.5 billion ($8 billion), almost 50 percent more than estimated previously, and be delayed.
The startup date of the Sturgeon upgrader and refinery in Redwater, Alberta, will be pushed back to September 2017 from mid-2016. Both Canadian Natural and the Alberta government have agreed to inject further capital in the form of debt financing into the project, according to a company release.
“The project remains a good deal for taxpayers,” Alberta Energy Minister Ken Hughes said in an e-mailed statement. “With the persistent discount on bitumen -- the bitumen bubble -- and equally persistent high prices for transportation fuels, we continue to expect a better return for Albertans’ barrels of bitumen through this enterprise than if we simply took the royalties in cash.”
The Alberta government receives a portion of its oil industry revenue in the form of heavy oil bitumen produced in the oil sands, the world’s third-largest reserve. It agreed to back 75 percent of the debt to build the upgrader so it can get a higher return as the plant converts heavy oil into more valuable light crude and diesel fuel.
Bitumen prices has declined as the province’s production has outgrown its export capacity, creating the “bitumen bubble.” Western Canadian Select heavy bitumen blend was $66.75 on the spot market today, $23.25 a barrel less than upgraded Syncrude light oil, according to data compiled by Bloomberg.
Canada’s heavy crude production will rise 10 percent to 1.48 million barrels a day this year, according to a forecast by the country’s National Energy Board. Enbridge Inc. (ENB) said space is overbooked this month on its Mainline pipeline, the largest crude oil export system in Canada.
The revised cost is “huge,” amounting to C$170,000 per barrel a day of capacity, Kyle Preston, an analyst at National Bank Financial in Calgary, said in a phone interview. “I’m surprised they’re even going ahead with it.”
Canadian Natural Resources representatives didn’t immediately respond to an e-mail requesting comment. The Calgary-based oil and gas producer sanctioned the upgrader in November last year, saying it provided a competitive return on its investment that would help to reduce volatility in Canadian heavy crude prices.
The upgrader is a joint venture between Canadian Natural and North West Upgrading Inc. Under an agreement with the companies, the Albertan government is responsible for paying three-quarters of the debt from the plant over a 30-year term through bitumen processing fees.
The government is expected to supply 75 percent of the bitumen to the project through the Bitumen Royalty in Kind program -- bitumen it receives as royalties. Canadian Natural will supply the remaining 25 percent. The government will also pay 75 percent of operating costs.
“Everyone else has scrapped their upgraders,” Preston said, including Suncor Energy Inc., which canceled the planned C$11.6 billion Voyageur project in April. Guaranteed support from the Alberta government may be the reason this project hasn’t been dropped, he said.
The cost inflation cited by the companies seems to be a “project-specific issue,” Preston said. Oil-sands projects by Canadian Natural, Suncor and Cenovus Energy Inc. are coming it at or below budget, he said.
“The guys up in the oil sands, they’re taking steps to really manage these costs, limiting the number of people on site at any one time and spreading it over a number of years,” Preston said.
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