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Royal Dutch Shell Plc .com: Some oilsands projects could end up shelved

Jon Harding, Financial Post Canada
Published: Friday, July 07, 2006

CALGARY – Concerns about rising costs related to oilsands development in Alberta have been building for months, but a warning issued by Western Oil Sands Inc. is the first tangible evidence some projects and expansions might have trouble getting off the drawing board.

The partner in the joint-venture Athabasca Oil Sands Project (AOSP) said this week the cost to build a first expansion phase has soared 50% since last fall, when project operator Shell Canada Ltd. more than doubled an initial investment forecast to $7.3-billion.

Western Oil Sands’ statement would therefore bump the project’s price tag toward $11-billion, a figure operator Shell Canada, with a 60% stake in the ASOP, did not refute yesterday at a major oilsands conference in Calgary hosted by TD Newcrest.

Gary Aitken, director of equity research at Bissett Investment Management, said Western Oil Sands and Shell sent the sector and investors a loud signal.

“I think that perhaps there is some cautioning going on,” Mr. Aitken said, adding it’s likely that projects among the nearly $100-billion worth of investment planned for the oilsands over the next 10 years will be delayed rather than scuttled altogether.

Chevron Corp., like Western Oil Sands, owns 20% of the project, which includes the Muskeg River mine north of Fort McMurray and the Scotford upgrading complex east of Edmonton.

The AOSP had a capacity to produce about 155,000 barrels a day when it became operational in 2003. The partners have been planning to build three consecutive expansions, each adding incremental production of 100,000 barrels a day to ultimately boost daily output to 500,000 barrels.

Brian Straub, senior vice-president oilsands for Shell Canada Ltd., said in an interview he is confident Shell Canada will be in a position by the end of the month “to come to the market and offer better direction on what the meaning and size of the [new] capital numbers are.”

He didn’t deny Shell Canada, the Canadian unit of Royal Dutch Shell PLC, is now gauging whether it’s prudent to proceed with the expansion or wait until the sector cools. “We’ve got it nicely sized and scoped. It’s just a matter of making sure we’re comfortable with the cost and schedule,” he said.

“There is intense pressure for materials and equipment world wide. On the labour side, we require a sizeable number of tradespeople to execute these projects. We’ll find solutions.”

Western Oil Sands said it has locked in prices, via hedging contracts with a floor price of US$52.50 a barrel, for its portion of AOSP production between 2007 and 2009. “As we go, we’re comfortable the hedge will support the expansion financing,” said David Dyck, Western Oil Sands chief financial officer.

Leaders of companies moving into Alberta’s booming oilsands sector have been hinting for months that something will have to give for all plans to fall into place on budget and on schedule through to 2015.

Imperial Oil Ltd. president and CEO Tim Hearn last year advised his oilsands sector counterparts to cool it, saying a “gold rush” mentality in the sector could leave some players “hurt.”

Imperial is planning to build a $5-billion to $8-billion oilsands mine at Kearl Lake, but has said it will take a pass on building a multibillion upgrader that turns bitumen into higher-priced synthetic crude.

Like Imperial Oil, Husky Energy Inc. has said it would take a pass on building an upgrader because of the current challenges facing the industry.

© National Post 2006

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