CNRL takes steps to reduce cost risk on expansion of its Horizon project
Thursday, 09 December 2010 13:15
Taking to heart lessons learned from the cost overruns on the $9.7 billion first phase of its Horizon oilsands mine north of Fort McMurray, Canadian Natural Resources Limited has overhauled its project execution strategy as it plans an expansion to 250,000 bbls per day of synthetic light crude.
Debottlenecking and expansion will be combined and the expansion from the current 110,000 bbls per day will be broken up into the five major components which will be further divided into 46 individual projects which the company can start and stop at its discretion, Steve Laut, company president, said in a conference call Thursday to discuss the company's 2011 capital budget.
With the creation of a number of smaller projects, "we are minimizing the chances of constraining capital and maximizing our ability to control costs and adapt to changing market conditions," he said. "It goes without saying that no expansions will proceed if they do not meet our thresholds."
Responding to a question, Laut said the company is targeting a cost of $90,000 per flowing bbl to $100,000 per flowing bbl of capacity.
Canadian Natural will complete a more detailed cost estimate in the first quarter of next year. "If our detailed cost estimates are not in the range we anticipate or we do not believe the market can handle additional work without igniting cost inflation then we will not proceed with any of the 46 individual projects that make up the total expansion plan," he said.
So far, the company has not yet seen signs of inflation but "the risk is that as you start seeing more and more projects and as operators start to build, we'll ignite that inflation again," Laut said in an interview. "We want the flexibility to be able to step aside if that happens."
Capital spending for Horizon expansion in 2011 will be between $800 million and $1.2 billion.
All the reliability (formerly Tranche 2) projects are underway and well advanced.
"We are on schedule and importantly trending about 10% below our cost estimate ($830 million versus the $925 million original estimate)," said Laut. When completed these projects will not only delivery lower costs and increased reliability but will add 5,000 bbls per day of light synthetic crude capacity in 2011/2012.
The Directive 74 equipment and tailings processes required to meet Energy Resources Conservation Board standards by 2015 have a total cost of $930 million. They will be going ahead with full approval and a $130 million budget for 2011.
Other major expansion components are:
- Phase 2A: upgrading debottlenecking and coker expansion to increase SCO capacity by 10,000 bbls per day in 2013/14 ($200 million-$230 million in 2011);
- Phase 2B: Fourth ore preparation plant (OPP), additional froth treatment plant vacuum distillations, gas/oil hydrotreater increasing capacity by 45,000 bbls per day ($10 million to $295 million in 2011);
- Phase 3: OPP 5, extraction 3 and 4, combined hydrotreater, sulphur recovery adding 80,000 bbls per day of SCO capacity ($90 million-$150 million in 2011).
If Canadian Natural has a business case that meets its criteria and market conditions are favourable, it will kick off some construction work in the first quarter of next year, said Laut.
"Unlike the later stages of Phase 1 construction, we are positioning ourselves to ensure we do not become schedule driven on future expansions," he said. However, if there are no constraints on contractors or cost inflation, the second phase could come on in 2015. The third phase could follow in the 2017 time frame but "we have no problems pushing that back if we don't get competitive bids on our contractors going forward."
At an oil price of $75 per bbl, the return on capital Horizon is close to 15%, said Laut. "There's a myth out there, particularly with the public that these oilsands projects are huge moneymakers and generate all kinds of returns but the truth is they just barely get over our 15% after-tax return criteria."
Under the revised execution strategy, each of the individual projects will consist of engineering and procurement (E&P) and construction. While Canadian Natural will use lump sum contracts for E&P or construction when possible, the use of combined EPC lump sum contracts is expected to be rare, according to Laut.
The construction labour force will be capped at 5,500 compared to a peak of 10,000 workers at the peak of Phase 1 construction. Yearly capital exposure also will be capped at between $2 billion and $2.5 billion.
Canadian Natural is working with merchant upgrader North West Upgrading Inc. and the Alberta government on an agreement under which North West will acquire government bitumen royalty-in-kind for its proposed upgrader. Laut said negotiations are going well and he expects an agreement to be signed. If that occurs, Canadian Natural will announce additional capital spending which could include significant capital in 2011 for more detailed engineering so that construction could begin in 2012.
In 2011, the focus will be on maintaining Horizon's reliability at design rates of 110,000 bbls per day of synthetic light crude. The company expects a solid December after making it through the last couple of weeks of extremely cold weather, said Laut.
Horizon production averaged 107,900 bbls per day in November after the Pressure Swing Adsorption (PSA) beds recovered better than had been expected, said the company. Although the PSA unit performance will be closely monitored, the likelihood that a complete shutdown will be required has been reduced significantly, and scheduled maintenance work will be performed if necessary.
Canadian Natural continues to target fourth quarter production of between 90,000 bbls per day and 100,000 bbls per day and overall annual production of between 90,000 bbls per day and 93,000 bbls a day.