Horizon Oil Sands
Canadian Natural's Board of Directors sanctioned the Horizon Oil Sands Project in February 2005 and after years of planning and construction, the Horizon Oil Sands successfully and sustainably produced its first barrels of high quality, low-sulphur, 34° API, sweet synthetic crude oil (SCO) in early 2009. First production of SCO was a major milestone for Canadian Natural and we are very pleased with the success of the project. Acting as our own primary contractor on the Horizon Oil Sands, we have built a core competency in executing large scale projects from the ground up and have learned a great deal from the construction and start up of Phase 1.
The Horizon Oil Sands include a surface oil sands mining and bitumen extraction plant, complimented by on-site bitumen upgrading with associated infrastructure to produce high quality SCO. Canadian Natural holds extensive leases that are estimated to contain approximately 14.3 billion barrels of bitumen initially in place (BIIP), with best estimate contingent resources other than reserves of 3.0 billion barrels of bitumen and 2.9 billion barrels of proved and probable SCO reserves. The Horizon Oil Sands are located on these leases just north of Fort McMurray, Alberta in the Athabasca region. Due to the massive resource base, the mine and plant facilities are expected to produce for decades to come without production declines normally associated with crude oil production.
The total construction and start up cost for Phase 1 was $9.7 billion, or $88,182 per flowing barrel of capacity. The final cost was 43% above our original estimate of $6.8 billion first set in 2004. However, the total cost of the Horizon Oil Sands comes in well below the industry average for current and future projects with similar facilities. First oil was achieved approximately 7 months beyond the initial target we set upon project sanctioning in 2002. Although both the cost and schedule were over initial targets, the project was built in an extremely volatile and inflationary business environment and in that respect, we consider it a success.
Full production capacity for Phase 1 is targeted to deliver 110,000 bbl/d of fully upgraded, light, sweet, SCO. At full production, we target the operating cost for the life of the mine to be between $25 and $35 per barrel of SCO, a low-cost producer within the oil sands industry.
Looking to the future of the Horizon Oil Sands, Phase 1 is just the first step in value creation from this significant asset. A considerable amount of capital for infrastructure was included in Phase 1 in anticipation of future phases. These include but are not limited to, support infrastructure such as the aerodrome, buildings, shops, warehouses, camps and roads, site preparation, the piperack, coker foundations, gas and power distributions, the majority of underground piping and so on. There is also the added benefit that a large portion of this work was completed early on in the construction process, a much less inflationary business environment. Canadian Natural is in the position to leverage the benefits from our existing operation into future expansions.
The expansions to the Horizon Oil Sands have been broken into five categories. Going forward, Canadian Natural wants to avoid the “mega-project” approach to development and feel that breaking the overall expansion into smaller, more manageable pieces will lead to enhanced project and cost control. Tranche 1 of the expansion was completed during 2007. This tranche included engineering and design specifications for greater production capacity, the setting of additional coker foundations, other supporting infrastructure, and the procurement of long lead equipment such as coke drums, reactors and mobile equipment. Future expansion has been re-profiled into five categories as follows:
We will see incremental production gains throughout the completion of future expansion and debottlenecking, with targeted full facility capacity of approximately 250,000 bbl/d. Further phases of expansion will bring the ultimate capacity to 500,000 bbl/d.
The timing of construction for future expansions is critical for cost control and we would like to stay in the position to take advantage of the recent downturn in market activity. But we are not driven to production increases at the expense of a higher capital cost. Current expansion and debottlenecking will be very deliberate and flexible to ensure projects can be started or stopped based on market conditions. The Horizon Oil Sands asset is substantial and anticipated to provide significant free cash flow well into the future. The development of this world class asset is predicated upon generating the greatest value for our shareholders.
As part of Canadian Natural’s disciplined execution strategy to achieve cost certainty for a defined and stepped expansion at its Horizon operation from the current 110,000 bbl/d to 250,000 bbl/d of SCO capacity, the Company’s Board of Directors has approved targeted strategic expansion capital expenditures at Horizon for 2012 of approximately $2 billion. It is expected that certain projects will be advanced and contracts finalized in 2011 and 2012 such that the execution of engineering, procurement and construction activities will be undertaken in 2012 resulting in the above noted strategic expansion capital expenditures. Decisions to proceed with individual projects, or the next stage of the expansion, will be based on then market conditions, the risk factors associated with the project, execution performance to date and the overall strategy to deliver the expansion phase of the project in a cost contained manner.
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