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Canadian Natural Upgrader Cost Increases by Almost 50%

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Dec. 5 (Bloomberg) -- Canadian Natural Resources Ltd. 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 previously estimated. The project will also be delayed and bring a lower rate of return to the company.

The Sturgeon upgrader and refinery in Redwater, Alberta, faced rising costs as it finished engineering and hired contractors, Canadian Natural said in a release yesterday. The startup date will be delayed to September 2017 from mid-2016. Both Canadian Natural and the Albertan government will inject more capital in the form of debt financing into the project, and the company’s rate of return will fall by a percentage point to 5 percent.

“The project still makes sense for Canadian Natural to invest in,” Corey Bieber, the company’s chief financial officer, said in an e-mail yesterday. “Not only do we earn a base rate of return on our investment, but once the project is complete we earn the value of the upgrading of our bitumen to fully refined products.”

Other companies in Alberta’s oil sands have abandoned upgraders, plants that convert the region’s heavy oil-sands crude into more valuable light oil, because of their high cost. Suncor Energy Inc. canceled its C$11.6 billion Voyageur project this year, after Chief Executive Officer Steve Williams said its economics were “challenged.”

Most of the extra cost will be borne by the Alberta government. Canadian Natural will pay an extra C$350 million over three years as a result of the higher costs, Bieber said. Canadian Natural shares fell as much as 1 percent to C$34.29 a share in trading on the Toronto Stock Exchange today.

Bitumen Bubble

“The project remains a good deal for taxpayers,” Alberta Energy Minister Ken Hughes said in an e-mailed statement yesterday. “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.”

Alberta’s government receives a portion of its oil industry revenue in the form of heavy oil bitumen produced in the oil sands, which hold the world’s third-largest oil reserves. 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.

Canadian Crude

Bitumen prices have declined as the province’s production has outgrown its export capacity, creating the “bitumen bubble.” Western Canadian Select heavy bitumen blend was $66.90 a barrel on the spot market at 12:05 p.m. New York time today, $23.25 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. said space is overbooked this month on its Mainline pipeline, the largest crude oil export system in Canada.

“I’m surprised they’re even going ahead with it,” Kyle Preston, an analyst at National Bank Financial in Calgary, said in a phone interview yesterday. The revised cost is “huge,” amounting to C$170,000 per barrel a day of capacity, he said.

The upgrader is a joint venture between Canadian Natural and North West Upgrading Inc. The Albertan government is responsible for paying three-quarters of the debt from the plant over a 30-year term through bitumen processing fees.

Scrapping Upgraders

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, which canceled the 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 specific to this project, Preston said. Oil-sands projects by Canadian Natural, Suncor and Cenovus Energy Inc. are coming in 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.

To contact the reporters on this story: Edward Welsch in Calgary at ewelsch1@bloomberg.net; Rebecca Penty in Calgary at rpenty@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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