Imperial Oil Delays Decision on C$8 Billion Oil-Sands Project

By Ian McKinnon

Aug. 7 (Bloomberg) -- Imperial Oil Ltd., Canada's largest oil company, is postponing until next year a decision to proceed with a proposed C$8 billion ($7.64 billion) oil-sands mine after legal delays.

The board won't decide on the Kearl project until the first quarter of 2009 because of an environmental legal battle and design revisions to curb cost increases, Chief Executive Officer Bruce March said yesterday. Initial output of 100,000 barrels of oil a day may not start until early 2012, he said.

The slower pace will result in a ``better starting point and a better-developed project than we ever had,'' March said in an interview at Imperial's headquarters in Calgary. ``We think that's critical to do in this market because your risks and exposure on cost growth is enormous.''

Producers such as Royal Dutch Shell Plc and Canadian Natural Resources Ltd. are seeing costs surge in Alberta's oil- soaked sands as record energy prices increase competition for workers and equipment. Costs for Canadian Natural's Horizon oil- sands project jumped as much as 36 percent to C$9.27 billion, the company said yesterday in a statement.

March, 51, who took the helm at Imperial in April when Tim Hearn retired, previously said a funding decision on Kearl could be made this year and output may start in late 2011. A revised cost estimate and schedule will be issued once the board authorizes the mine. Imperial is owned 70 percent by Exxon Mobil Corp., the world's largest oil company.

The mine's cost won't be ``considerably higher'' than the estimate of C$8 billion, March said. ``I don't anticipate that we won't go ahead at this stage.''

`Very, Very Good' Economics

While higher costs have blunted the impacts of rising oil prices, Kearl's economics look ``very, very good,'' said March, who joined an Exxon Mobil predecessor in 1980. Imperial owns 70 percent of Kearl, which may produce as much as 300,000 barrels of heavy oil a day, and an Exxon Mobil unit owns the rest.

The project was delayed by about two months by a court fight over water permits to drain the mine's marshy site in northern Alberta, March said. The company is spending extra time on scheduling and other construction planning to blunt costs.

Imperial owns oil and gas wells in western Canada and has a 25 percent stake in oil-sands miner Syncrude Canada Ltd. The company also owns four refineries and operates about 2,000 Esso- branded fuel stations across Canada.

Imperial plans to boost its natural-gas output by drilling for deposits in shale formations of northeastern British Columbia.

Shale Developments

``We're moving quickly to do this development work this winter,'' March said, without elaborating. ``If it looks good, which we certainly hope and expect that it will, we'd be trying to move as rapidly as we can to more stable commercial development.''

Imperial owns about 115,000 acres in the Horn River area of northeast British Columbia, the company said in April. The region's shale formations could contain gas reserves in the trillions of cubic feet, companies including Canada's Nexen Inc. and Houston-based Apache Corp. have said.

Increased exploration and development spending would help Imperial stem declining output, said Charles Maxwell, senior energy analyst at Weeden & Co., who doesn't rate the company's shares and owns none. He made his comments in an Aug. 5 telephone interview.

``Imperial has been sitting there chewing comfortably on its cud for the past 35 years,'' Maxwell said. ``They are maybe getting a little uncomfortable because they aren't growing any more and everyone is coming up around them. All the flowers are becoming a jungle of vines that look like they are going to overwhelm Imperial.''

`Low Priority'

Production of gas, which comprised about 17 percent of second-quarter output, fell 37 percent from a year earlier to 310 million cubic feet a day. Gas has been a ``low priority'' for oil-focused Imperial, and the company lags behind rivals including EnCana Corp. and Devon Energy Corp. in production of the heating and power-plant fuel, Maxwell said.

Daily production at EnCana, Canada's largest gas producer, rose 7 percent in the second quarter from a year earlier, according to the company's Web site.

Devon, the biggest so-called independent oil and gas producer in the U.S., yesterday said second-quarter output rose 4 percent.

Imperial's shares have fallen about 10 percent this year, the second-worst after Petro-Canada among Canada's oil companies with market values exceeding C$16 billion that trade on the Toronto Stock Exchange.

``It's still a great investment for the long term,'' March said. ``I'm still acquiring shares, so I still like it.''

To contact the reporter on this story: Ian McKinnon in Calgary at imckinnon1@bloomberg.net.