Petro-Canada Plans C$26.2 Billion Oil-Sands Project

Petro-Canada, the third-largest oil company in Canada, and its partners will spend C$26.2 billion ($24.6 billion) to build an oil-sands development in northern Alberta, proceeding in two stages to cut costs.

The Fort Hills project will be designed to produce 280,000 barrels a day of synthetic crude oil from the tar-like deposits by 2014, with output starting in the second quarter of 2012, the Calgary-based company said today in a statement. The project has been under development for more than five years.

Petro-Canada, UTS Energy Corp. and Teck Cominco Ltd. spent months reviewing the project's design as rising oil prices sparked a boom in tar-sands development and pushed up costs for labor and equipment. The project will be built in two stages to ease demand for skilled construction workers.

``This step puts us on path for a final go-ahead project decision in the third quarter of 2008,'' Petro-Canada Chief Executive Officer Ron Brenneman said in the statement. The partners are waiting for regulatory approval to build a plant that will convert the tar-like bitumen mined from the sands into marketable synthetic crude oil, he said.

The C$14.1 billion first stage is expected to produce 140,000 barrels of synthetic crude oil per day by the second quarter of 2012. A second phase will cost C$12.1 billion. Land owned by the partners to support the project may contain as much as 5 billion barrels of bitumen, Petro-Canada has said.

Expected Returns

The initial phase will earn a return of 8.2 percent with oil selling at $45 a barrel, Neil Camarta, Petro-Canada's senior vice president for oil sands, said on a conference call with analysts and investors. The return jumps to about 12 percent with oil at $60, he said.

Shares of Petro-Canada rose 54 cents to C$55.86 at 9:40 a.m. on the Toronto Stock Exchange. UTS shares rose 21 cents, or 3.5 percent, to C$6.15, and Teck Cominco's shares rose C$1.37, or 3 percent, to C$47.31.

In April 2006, UTS said production of 170,000 barrels of bitumen a day was possible by 2011, up from a previous target of 100,000. Tar-like bitumen must be processed into synthetic crude oil for sale to refiners for processing into fuels such as gasoline and diesel.

UTS said previously the first stage of the project could cost up to C$15 billion. At a conference for analysts in October, Petro-Canada said the project could be built in three stages.

The oil sands, 750 kilometers (466 miles) north of Calgary, are estimated to contain 175 billion barrels of recoverable oil, second only to Saudi Arabia's 259 billion barrels, according to the Canadian Association of Petroleum Producers.

Oil-Sands Boom

The boom in oil-sands projects, spurred in part by oil prices more than doubling in the past four years, has increased competition for labor and equipment. Calgary-based Nexen Inc. in April raised the cost estimate for its Long Lake oil-sands project for the third time in 15 months. Long Lake, scheduled to produce 60,000 barrels of synthetic crude a day in 2009, might cost as much as C$5.3 billion, Nexen said.

The partners have regulatory approval to produce 190,000 barrels of oil from the mine north of Fort McMurray. They applied for permits to build the bitumen processor, called an upgrader, about 40 kilometers (25 miles) northeast of Edmonton, Alberta.

Delayed Coking

The upgrader will use a processing method called delayed coking, which heats up the bitumen to produce synthetic crude. The process results in about 85 percent of the bitumen being upgraded into the more valuable type of oil, Petro-Canada has said.

Petro-Canada owns 55 percent of Fort Hills. UTS, also based in Calgary, holds 30 percent and Vancouver-based Teck Cominco, the world's biggest zinc miner, owns the remaining 15 percent.

Imperial Oil Ltd., 70 percent owned by Irving, Texas-based Exxon Mobil Corp., is Canada's largest oil company by 2006 sales, followed by EnCana Corp.

Petro-Canada produces oil and natural gas in North America, Africa and the U.K. It also owns refineries and a national chain of fuel stations in Canada.

source:bloomberg.com