New price tag for Imperial's Kearl mine reflects rising oil sands costs

Share

Imperial Oil Ltd. jacked up its spending budget for the massive Kearl oil sands mine, sparking concern the industry's costs are rising sharply as companies plow ahead with multibillion-dollar projects.

The Calgary oil giant, majority-owned by Exxon Mobil Corp. , expects to spend about $30-billion developing the Kearl mine, a 25-per-cent increase over its previous estimate. Imperial provided the revised forecast on Wednesday as it announced plans to build Kearl's $8.9-billion expansion phase.

Oil sands mining projects are notoriously expensive, and the industry wants to avoid repeating the mistakes energy companies made during Fort McMurray's last boom, which culminated around 2008. Companies blew through their budgets before the global economic crisis clobbered the price of oil and forced them to shelve a slew of projects.

Industry officials today are cognizant of creeping costs and are trying not to stoke costs for labour and materials. But as executives, loathe to be left without growth prospects, again earmark large amounts of capital to long-life projects, worries about costs are growing.

"Imperial's [announcement]is yet another data point that costs in the oil sands, and the potential for rampant cost inflation, is a very real threat for producers – at least those in the Fort McMurray region," Justin Bouchard, an analyst at Raymond James in Calgary, said in a note. "Oil sands mining companies are [at today's costs]effectively getting a mine-only operation for the cost of a mine plus an upgrader a few years ago."

Imperial, however, said its new budget is not about competition for labour or steel. Instead, it said, the new budget reflects two key expenses that were not previously included in the calculations: improvements to its tailings-pond system; and pipelines that will connect the Kearl project to other major lines.

Pius Rolheiser, an Imperial spokesman, said many of the changes were made so Kearl could comply with Alberta's new tailings-pond regulations, known as directive 74.

"That includes changes to the mine design, the tailings area design, and also technology changes that will alter the characteristics of the tailings before we deposit [them]" Mr. Rolheiser said. "All of these are geared toward enabling better and faster reclamation." Kearl is not expected to meet directive 74's targets on time, but will meet its objectives over the entire lifetime of the mine.

Kearl was originally designed to be constructed in three phases. Last May, however, Imperial amended the plan and said it would build an initial development, an expansion phase, and then go through a "debottlenecking" period which would make the whole operation more efficient.

Imperial estimates the capital costs to develop the 4.6 billion-barrel resource at Kearl will be about $6.20 per barrel, up 24 per cent from its previous estimate of $5 per barrel. "We have a high degree of confidence on the $6.20 on the initial development and the expansion," Mr. Rolheiser said.

There is still a significant amount of engineering and planning work to finish before the price tag on the debottlenecking phase can be pinpointed, but Imperial expects it to be about $6.20 per barrel as well, he said.

When the company unveiled the new blueprints in May, it increased the cost of the first phase to $10.9-billion from $8-billion, in part reflecting revisions to its tailings-pond system. That revision still expected capital costs to ring in at $5 per barrel.

At completion, Kearl will have the capacity to produce 345,000 barrels of oil per day. Imperial hopes to have wrapped up its capital investments in the project by 2020.

Canadian Natural Resources Ltd. , Suncor Energy Inc. and Syncrude Canada Ltd. each have major mining expansion projects teed up, Mr. Bouchard noted. Earlier this month, France's Total SA received regulatory approval to build its Joslyn North project, Canada's fifth oil sands mine.