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BLOOMBERG: Shell Canada Oil-Sands Cost Target Jumps to C$7.3 Bln

BLOOMBERG: Shell Canada Oil-Sands Cost Target Jumps to C$7.3 Bln

“Shell Canada Ltd., the fourth-largest Canadian oil company, said the cost to expand its Alberta oil- sands development will almost double to C$7.3 billion ($6 billion)…”

Posted Wednesday 10 August 2005

(Bloomberg) — Shell Canada Ltd., the fourth-largest Canadian oil company, said the cost to expand its Alberta oil- sands development will almost double to C$7.3 billion ($6 billion) as prices of steel, cement and equipment rise.

Design changes that will make additional expansions easier also are inflating the cost, spokeswoman Janet Annesley said today in a telephone interview. Calgary-based Shell Canada and its project partners, Chevron Corp. and Western Oil Sands Inc., in April said the expansion would add 100,000 barrels a day of mining and refining capacity at a cost of at least C$4 billion.

Rising oil prices, which today touched a record $64.27 a barrel in U.S. futures trading, are spurring more investment in Alberta’s oil sands, which contain the world’s largest petroleum deposits outside Saudi Arabia. Such companies as Syncrude Canada Ltd., the world’s largest oil-sands miner, have raised spending targets as competition for labor and materials increases.

“Costs are just getting mind-boggling,” said Glen MacNeill, who manages C$800 million in assets, including 105,000 Shell Canada shares, at Sentry Select Capital Corp. in Toronto. “It’s making me a lot more cautious. Investors just can’t go in and buy the models that the companies are giving you because they don’t work.”

Producers are tackling riskier and more expensive projects as easier fields are either depleted or off limits. Demand gains in China and the U.S. have outpaced additions to supplies.

Expansion Project

The Shell Canada expansion, which is under review by provincial regulators, will bring total output from the Athabasca oil-sands venture to about 300,000 barrels of bitumen a day by 2010. The company said it plans to eventually raise output to as much as 500,000 barrels a day.

Shell Canada owns 60 percent of Athabasca. Chevron, the second-largest U.S. oil company, and Calgary’s Western Oil Sands have 20 percent stakes.

The budget revision follows last month’s announcement by Shell Canada’s parent, Royal Dutch Shell Plc, that costs for the Sakhalin project in Russia may double to $20 billion, said Craig Pennington, head energy analyst at Schroders Plc in London.

“Shell seems to have gone off the rails on this one project,” Pennington said. “Sakhalin, that wasn’t properly budgeted, and with Athabasca it has fallen foul of an industry trend of rising costs for oil-sands projects.”

Shares of Shell Canada rose 28 cents to C$39.45 at 3:37 p.m. in Toronto Stock Exchange trading. Western Oil Sands fell C$1.56, or 4.8 percent, to C$30.94. Chevron, based in San Ramon, California, fell 18 cents to $61.08 in New York.

High End of Estimated Range

Annesley, the spokeswoman, declined to say how much the change in design contributed to increases in costs. The revised cost target is at the high end of Shell Canada’s estimates, which are still being finalized, she said.

Changes such as adding a unit to increase the output of valuable light oil could add as much as C$2 billion to the cost of Athabasca’s expansion, said Tom Ebbern, an analyst at Tristone Capital Inc. in Calgary who rates Shell Canada shares at market perform and doesn’t own any.

Syncrude Canada Ltd., the world’s largest oil-sands miner, in July raised the estimated cost of its expansion to C$8.1 billion. It was the third increase in 18 months.

Producers extract a tar-like substance, bitumen, from northern Alberta’s oil sands. The heavy oil is then piped to refineries for processing into a synthetic crude that can be made into gasoline and other fuels.

Athabasca produced 164,200 barrels of bitumen a day in the second quarter, Shell Canada said on July 21.

Output to Rise

Canada, the second-biggest supplier of crude oil to the U.S., plans to increase output from the oil sands to about 2.7 million barrels a day by 2015 from 1 million barrels today, according to a report last month by the Canadian Association of Petroleum Producers. About C$45 billion will be invested in oil- sands between now and 2010, the group estimated.

Alberta’s unconventional oil reserves contain about 174 billion barrels of oil, according to the association.

Vancouver-based Terasen Inc., which owns the pipeline that transports Athabasca’s oil to an Edmonton refinery from a mine north of Fort McMurray, yesterday said it may spend as much as C$1 billion to almost double daily capacity to 500,000 barrels a day by 2009.

Houston-based Kinder Morgan Inc. on Aug. 1 said it agreed to buy Terasen for about $3.1 billion in cash and stock.

Imperial Oil Ltd. is Canada’s largest petroleum producer, followed by EnCana Corp. and Petro-Canada.

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