Thursday, May 23, 2013

CNRL's Horizon expansion under budget (so far)

The Horizon mine today, picture stolen from CNRL homepage.
Here's an article about the progress on CNRL's Horizon mine expansion. On the upgrade from 110,000 to 250,000 barrels per day, they say they're now 20% done and 10% under budget. Doesn't say if the expansion is on schedule (although CNRL's Kirby SAGD project is apparently ahead of schedule). Ultimately they say they're going to increase the mine size to 500,000 barrels per day, although don't provide a timeline or anything on how they intend to do so, as far as I can see.

Will they stay under budget? Possibly, the labour market is apparently a lot looser than it was when they made Horizon Phase 1. That project that cost about $10 billion after being initially estimated at cost $7 billion. Horizon has only had one quarter running at its intended capacity of 110,000 barrels per day - the first three months of this year. Not sure if that means Phase 1 was behind schedule as well as over budget. (As a side note, the project is unfortunately not expecting to run at capacity in the next two quarters thanks to planned maintenance. Instead they're expected to produce 77 and 83 thousand barrels per day respectively).

This article has a few other details. The expansions (called Phase 2 and Phase 3) are expected to be completed in 2017. Although it also doesn't have a total cost for the expansions, the company has previously stated it is aiming for a cost of $90,000 and $110,000 per barrel per day production, which for 140,000 barrels per day means $12.6 to $15.4 billion. That's pretty confusing since they say they want to control costs better than they did in Phase 1, which cost $88,000 per barrel per day and I would have thought an expansion would be cheaper than the original development. Maybe inflation is having a big impact on their estimates, but it makes me wonder if maybe they're only under budget because they have a very conservative set of cost estimates? Integrated mining efficiency is given as $130,000 per barrel per day in this interesting Macquarie report, so maybe they're not being that pessimistic. Costs in 2013 on Horizon are expected to be $2 billion or so, and the CNRL website says they spent $2 billion on the project in 2012. This website says they expected to spend $0.8 to $1.2 billion on expansions in 2011. Unless there was significant capital spent before 2011, that means they have a whole lot of capital left to spend unless they're way under budget. That makes me doubt the 2017 completion date they claim. That site also says they've split the Phase 2 and 3 expansions into 43 separate projects (meaning Phase 2 and Phase 3 projects overlap), thinking that will keep costs under control better, or perhaps more accurately will allow them to abandon a project if it is going way over budget. I guess we'll see if that strategy works out for them, I know they've succeeded in confusing me.

Of course if the current pipeline capacity crunch isn't sorted out by the time this mine ramps up, it will add to Canada's "oil glut" problem which is driving down prices. Of course those lower prices are part of the reason labour is cheaper in Alberta now, which is why Horizon is under budget at the moment, so it would seem to be an intricate collection of double-edged swords.

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