Petro-Canada Sees Surging Costs at Fort Hills Project

By Stephen Bierman

Sept. 17 (Bloomberg) -- Petro-Canada and partners estimated investments to develop the Fort Hills oil sands project in Alberta may be more than 50 percent higher than forecast last year as labor, materials and construction costs climb.

The estimate has risen to C$23.8 billion ($25.5 billion), excluding some costs such as feed engineering, from C$14.1 billion, Martin Sandell, a vice president at Calgary-based UTS Energy Corp., which holds 20 percent of the project, said on a conference call today. Petro-Canada owns 60 percent and Teck Cominco Ltd. owns the rest.

``The numbers are still a moving target in terms of final dollars,'' Peter Symons, a Petro-Canada spokesman, said by telephone from Calgary. ``The scope of the project, the targets remains the same.''

An investment decision will be made in the fourth quarter after completion of the engineering and design plan. The project targets production of 280,000 barrels of crude a day by 2015. By, comparison, Petro-Canada expects output of 420,000 barrels of oil equivalent a day this year.

Moving Target

The company, in the first stage, has aimed to produce 140,000 barrels a day of synthetic crude from the fields, with initial output from the Sturgeon upgrader in the second quarter of 2012. It estimates associated bitumen production of 160,000 barrels a day with initial production in the fourth quarter of 2011, Petro-Canada said.

The project will also require regulatory permits for mines and the Sturgeon upgrader located near Edmonton, Symons said.

UTS Chief Executive Officer William Roach said the cost increased is ``of great concern,'' according to a statement. ``The partnership is working together constructively to examine all options available to the project, including re-phasing with UTS' specific objective to reduce the capital exposure prior to first oil,'' he said.

UTS shares plunged 38 percent to C$1.48 as of 11:19 a.m. in Toronto. Petro-Canada fell 2.9 percent to C$38.5. Teck Cominco fell 3.3 percent to C$34.25.

``Financing was already a concern in the current credit market,'' UBS AG analyst Andrew Potter wrote in a research report. ``With the mounting cost escalation and a sum of $3 billion of additional financing, UTS faces considerable headwinds moving forwards.''

To contact the reporter on this story: Stephen Bierman in London ext 4139 sbierman1@bloomberg.net.