Canadian Natural says oil sands inflation in check

Fri May 4, 2012 2:14pm EDT
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By Scott Haggett

CALGARY, Alberta (Reuters) - Canadian Natural Resources Ltd (CNQ.TO: Quote), the country's largest independent oil producer, said on Friday it is holding the line on costs as it expands in the northern Alberta oil sands, the latest producer to play down fears of a new round of hyperinflation in the region.

The company expects to spend nearly C$2 billion ($2.01 billion) this year advancing a plan to increase production capacity at its Horizon oil sands project to 250,000 barrels per day from a current 110,000.

After the cost of the project's initial phase came in C$9.7 billion, half again its original budget, Canadian Natural rejigged its expansion plan, breaking what had been a massive single project into 46 parts and limiting annual spending to no more than C$2.5 billion.

It also restricted the size of the construction workforce at Horizon to 5,500 at any one time. At the peak of the first phase of construction, there were 10,000 workers at the site.

The company said the strategy is working. Even though rising construction activity in the oil sands threatens to increase competition for skilled labor and materials, Canadian Natural said its costs are well under control.

"At this point our strategy's working well and we're on track with costs running slightly under our cost estimates," Steve Laut, the company's president, said on a conference call. "We expect this strategy of breaking into smaller pieces, stopping and redefining scope, and rebidding if necessary will continue to pay dividends going forward, even as market conditions potentially heat up."

Inflation plagued the oil sands industry before the 2008 financial crisis as project budgets routinely swelled, with costs for some more than doubling from original estimates.

While the recession cooled activity in the region, which contains the world's third largest oil reserve, a renewed round of new projects is underway. Output from the oil sands, currently about 1.5 million bpd, is expected to rise by nearly 500,000 bpd within three years.   Continued...