Canadian Natural Resources Invests Billions in Oil Sands

• The Company: Canadian Natural Resources, an oil and natural gas producer based in Calgary, Alberta.
• The Filing: Form 6-K filed with the SEC on August 13, 2008.
• The Finding: Canadian Natural Resources is encountering testing and commission delays with the upgrading plant at its Horizon Oil Sands Project, located in Alberta. Open mining of the first oil sands is ready, but the scheduled September ramp-up in producing the first barrels of Synthetic Crude Oil (SCO) has hit a snag.

The Upshot: Extracting and separating crude bitumen from clay and then refining the hydrocarbons into transportable SCO involve a complex — and expensive — critical pathway of many separate systems. Turning on the lights at the Horizon Project involves a punch-list of more than 800 plant systems! As such, delays are to be expected in start-up of oil sands operations.

The latest schedule slippage indicates that the targeted final cost will increase by another $535 million, bringing total cost overruns of the first phase of the Horizon Project to approximately 36 percent above the original 2004 budget of $6.8 billion.

Nonetheless, the company estimates the tar sands held under lease arrangements hold more than six billion recoverable barrels (under existing technologies), with a minimum 40-year economic life.

Scheduled ramp-up is currently targeted for the fourth-quarter, with estimated capacity in the sales pipeline of 70,000 barrels per day of SCO. Upon plant completion, facility capacity is estimated at 110,000 barrels of SCO a day.

Phase 2/3 plans — targeted for completion in 2011 — call for increasing production capacity to 232,000 barrels of SCO a day. Canadian Natural will need to draw on its untapped bank line of $2.7 billion in credit or other financing means to pay for this expansion, for the company had a working capital deficit of about $3.2 billion at June 30.

As the resource owner, the Province of Alberta believes it is entitled to take its royalty share of bitumen production, as it does currently for conventional oil production. Alberta is proposing royalty rates on oil sands ranging from one-percent to nine-percent on a gross revenue basis (depending on benchmark crude oil pricing).

The Question: What impact will implementation of new bitumen royalty rates have on future production output of oil sands?