December 2, 2010 / 11:48 AM / in 7 years

UPDATE 3-Canadian Natural goes slow on oil sands expansion

* Next Horizon phase rejigged into staged project

* Sees 2011 budget at C$5.57-C$5.97 bln

* 2011 production estimated 645,000-694,000 boed (Adds executive comments, details on Horizon)

By Jeffrey Jones

CALGARY, Alberta, Dec 2 (Reuters) - Canadian Natural Resources Ltd CNQ.TO will carve further expansion of its Horizon oil sands project into several small pieces as it seeks to avoid the ballooning costs that plagued the first phase.

Canadian Natural, the country’s biggest independent oil explorer, said it still aims to lift output at Horizon to an eventual 250,000 barrels a day from the current capacity of 110,000. But timing will depend on costs and market conditions, not hard-and-fast schedules.

With the resurgence in oil sands development over the past two years, Canadian Natural President Steve Laut is concerned about a return to the overheated construction environment that marked the period before the economic meltdown.

“We’re maximizing our flexibility to start and stop any individual projects based on what the market conditions are,” Laut said in an interview.

“If costs are too high, or productivity too low, which go hand in hand, we can make the decision to just not do that project and wait until the conditions improve.”

The first phase of the northern Alberta mining and synthetic crude processing development cost C$9.7 billion ($9.7 billion) after a series of overruns and delays.

Costs will now be spread over 46 individual projects within five separate stages, and production could climb through 2017, although the timing could easily slip, Laut said.

Annual project spending would be capped at C$2 billion to C$2.5 billion, and the peak construction labor force would be 5,500 workers, compared with 10,000 in phase one.

Canadian Natural, the largest of several energy, financial, industrial and sports concerns that count Calgary financier Murray Edwards as a major investor, said spending on Horizon could be C$800 million to C$1.2 billion next year.

It aims to have detailed cost estimates for the expansion projects in the first quarter of 2011.

After a slow start, Horizon output has been improving and is expected to average 105,000-112,000 bpd in 2011, up 19 percent from 2010. It pumped out 107,900 bpd in November, up more than 20,000 bpd from the month before.

The company announced it is reshaping the plans for Horizon in its 2011 corporate budget, which totals up to C$6 billion in capital spending, up as much as 7 percent from 2010.

Forty-five percent of the money will be used for long-term projects that will not yield production until after 2011.

Overall output is expected to average 645,000-694,000 barrels of oil equivalent a day before royalties, a mid-point increase of 6 percent from 2010.

Company-wide oil and gas liquids production is pegged at 449,000-486,000 barrels a day before royalties, 10 percent above the mid-point of 2010 production.

It forecast natural gas output at 1.18 billion to 1.25 billion cubic feet a day, about 3 percent lower than 2010.

In recent years, Canadian Natural has cut back on gas spending as prices have weakened, and reallocated cash into heavy oil projects. It may take two to seven years for gas markets to recover from the current glut, Laut said.

The budget is expected result in free cash flow of C$1 billion to C$1.8 billion.

Canadian Natural shares were up 68 Canadian cents, or 1.7 percent, at C$41.96 on the Toronto Stock Exchange. They had gained more than 8 percent in value year-to-date.

$1=$1.00 Canadian Additional reporting by Aftab Ahmed; editing by Rob Wilson

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