May 4, 2012 / 6:18 PM / 5 years ago

Canadian Natural says oil sands inflation in check

CALGARY, Alberta (Reuters) - Canadian Natural Resources Ltd (CNQ.TO), 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.

Despite the activity, Canadian Natural is the second major oil sands producer to say this week that inflation is not yet a major threat.

Suncor Energy Inc (SU.TO), the largest oil sands producer, said on Tuesday that inflation is a concern, but it is not seeing a repeat of the pressures it faced in 2008 because more engineering and design talent is available and fabrication shops are less busy.

As more producers look to add new projects while oil prices are strong, competition for labor and materials is likely to once again heat up, however.

"Inflation is always going to be lurking below the surface, especially in a sector like the oil sands where there's a multitude of projects that are still planned to break ground over the next few years," said Chris Feltin, an analyst at Macquarie Capital Markets. "Near term, maybe there hasn't been as much pressure on the cost side of things but I still see it as a risk for the sector in general."

EARNINGS MISS

Late on Thursday, Canadian Natural said that its first-quarter profit surged more than nine fold as oil sales rose 5 percent, partly offsetting an unplanned oil sands outage and weaker domestic oil and gas prices.

The company earned C$427 million, or 39 Canadian cents a share, up from a year-earlier C$46 million, or 4 Canadian cents a share.

The company's adjusted earnings, excluding one-time items, were C$300 million, or 27 Canadian cents a share, lagging the average estimate among analysts of 44 Canadian cents a share, according to Thomson Reuters I/B/E/S.

"The variance in financial results relative to our estimates was almost entirely due to larger-than-forecast cash taxes," Andrew Potter, an analyst at CIBC World Markets, wrote in a research note. "Overall (Canadian Natural) had a very mixed quarter."

Production averaged 612,279 barrels of oil equivalent a day, up 8 percent from the year-before quarter due to successful light and heavy oil drilling as well as the addition of some oil sands production compare with the same period last year.

Canadian Natural shares were down C$1.20 at C$31.74 early on Friday afternoon on the Toronto Stock Exchange.

($1=$0.99 Canadian)

Reporting by Scott Haggett; Editing by Peter Galloway

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