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Shell Canada Oil Sands Expansion Costs Jump 83%

10 August 2005

Oilsands_map
Athabasca Oil Sands Project.

Bloomberg. Shell Canada has increased its estimated cost for expanding its Athabasca Oil Sands Project production to 300,000 barrels a day from the current 200,000 by 83%—from C$4 billion (US$3.3 billion) to C$7.3 billion (US$6 billion).

Shell Canada plans to raise production in two more 100,000-barrel-per-day stages to an eventual 500,000 kbpd.

In the AOSP, the Muskeg River Mine extracts the bitumen, which is sent via a pipeline to the Scotford Upgrader in Fort Saskatchewan, Alberta. After upgrading from the heavy bitumen to a lighter oil, the product is sent to refineries.

(The pipeline owner, Terasen, recently said it may spend as much as C$1 billion (US$826 million) to almost double daily pipeline capacity to 500,000 barrels by 2009. On 1 August, Houston-based Kinder Morgan agreed to buy Terasen for about US$5.6 billion (C$6.9 billion).)

“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.”

Last month, Royal Dutch Shell—Shell Canada’s parent—announced that its Phase 2 costs for the Sakhalin oil and natural gas project in Russia may double to $20 billion.

The recoverable resource base in Sakhalin II is 17.3 TCF of gas and 1 billion barrels of oil—which, with the revised cost estimates, works out to a project development cost of some $5 to $6 per barrel of oil equivalent (in other words, cost of project divided by recoverable resource base).

Using a slightly different metric to view the development costs in the Athabasca Oil Sands Project (AOSP), Shell Canada estimates that for this first expansion, including the common infrastructure required to support the subsequent expansions, the cost could be up to C$200 (US$165) per annual barrel of production. In Shell Canada’s plans, the subsequent expansions will utilize the “pre built” infrastructure, lowering their expected capital requirements.

But even if the expansion cost is shared across the total volume of the subsequent planned expansions (essentially tripling the volume), that still works out to C$66.67 (US$55) per annual barrel of production—and that’s without factoring in any additional capital costs for the final two expansions.

In addition to higher materials costs, the increase in expansion costs include a number of design changes made to enhance reliability and produce less heavy oil, thereby improving the value of the synthetic crude oil blends. Because this expansion is the template for the subsequent two, it is critical for Shell—and its partners—to get it right.

The Athabasca Oil Sands Project consists of the Muskeg River Mine located north of Fort McMurray, Alberta and the Scotford Upgrader located near Edmonton and is a joint venture among Shell Canada Limited (60%), Chevron Canada Limited (20%) and Western Oil Sands L.P. (20%).

Shell is not the only oil sands producer seeing expansion costs rise. Syncrude, the world’s largest oil-sands miner, nudged up the estimated cost of its Phase 3 expansion to C$8.1 billion (US$6.6 billion) from C$7.9 billion—the third increase in 18 months.

Overall, the Canadian Association of Petroleum producers expects about C$45 billion (US$37 billion) to be invested in the oil sands between now and 2010.

August 10, 2005 in Oil sands | Permalink | Comments (7) | TrackBack (3)

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Listed below are links to weblogs that reference Shell Canada Oil Sands Expansion Costs Jump 83%:

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Comments

Oil sands is a major boondoggle. By the time we are despearate enough to really need them , the energy input costs will make it prohibitively expensive. It is also a very water intesive process and leaves major environmental damage from the slag pools left over. I hope the maketplace wises up on that, but I suspect strong governement subsidies are propping it up somewhere.

No actauly its the fact they have managed to make the process alot better over the years. They recycle most of the water they use tho even so they likely will be piping in huge amounts of it from regions that get tons of rain.

They already know how to cap tainted land and make it good again and know where they put the cap soil they took off in the first place..

Oh and its profitable rather profitable... we are talking about trillions of bucks...

Doubling of capital costs is no big deal if the price of crude has doubled. Also, an investment cost of $55US per annual barrel still leaves 364 days of income at $64 per barrel. Minus fixed costs of course (profitable at $25 IIRC).

John, the cost isn’t calculated on the basis of one day. It’s an entire year’s production.

$200/barrel x 100,000 barrels/day expansion x 365 days = $7.3 billion. (Canadian).

Thanks Mike for clearing that up :) Another way of looking at it is that each additional b/d incurs an extra $60k(US) in capital. With 3 years futures at c. $61.50, capital costs can be recovered in 2.7 years. Everything after that is gravy - sounds like a good business to me. I conveniently ignore operating costs :)

I'm not very impressed by the fact that all this tar sands oil production is using lots of valuable natural gas supplies that may be better used by homes for heating in the long run. It seems like Canada is putting the petro dollar above long term energy independence and environmental stewardship. When NG supplies are dwindling we'll be kicking ourselves for selling out to the US demand for 'safe' oil.

i enjoy building it, contributing.

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