Scarce Resources are the Driving Factor in Cost Increases in Alberta’s Oil Sands Patch

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Researched by Industrial Info Resources (Sugar Land, Texas). Capital projections for oil sands related projects in Alberta keep on climbing in an atmosphere of ever increasing costs related to equipment, engineering related services, and declining supplies of labor. The latest victim of these circumstances appears to be the Fort Hills oil sands project located just north of Fort McMurray, Alberta.

The proposed Fort Hills Project is an integrated oil sands mining, processing and synthetic crude production project that is projected to produce 190,000 barrels per day of synthetic crude in the first phase. The Fort Hills project is a joint venture between Petro-Canada Incorporated (TSX:PCA) (Calgary, Alberta) with a controlling 55%, UTS Energy Incorporated with a 30% share (TSX:UTS) (Calgary, Alberta) and the remaining 15% is owned by Teck Cominco Limited (NYSE:TCK) (Vancouver, British Columbia).

The latest capital estimates for the integrated mining costs from others in the industry is in the current range of approximately $90,000 to $120,000 per barrel of flowing oil. Petro-Canada has announced publicly that Fort Hills could generate an after tax internal rate of return of approximately $9 - $12 per barrel based on an oil price of $40 per barrel.

Problems with the availability of equipment and engineering services related to this project took a back seat to the real problem of finding the needed labor. Petro-Canada estimates that the project will involve finding over 10,000 skilled construction workers in an already over heated economy in Alberta. Petro-Canada was hoping to release its cost estimates for the project in early 2007 but now indicates that the estimates will not be ready until March of 2007 at the earliest. Even with the higher costs of constructing oil sands related production facilities, Petro-Canada stands by its schedule of first production from the Fort Hills project some time in 2007.

Earlier in 2006, another oil sands related joint venture lead by Shell Canada Limited stated that its Athabasca oil sands expansion project had nearly doubled in cost from approximately $5.5 to $11 billion CND. Petro-Canada is just the next mega oil sands project to join the club of realistic cost estimates, and in turn see the effect that increasingly scarce resources are having on projects of all sizes in Alberta’s oil sands patch.

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