Calgary Imperial Oil Ltd. will soon begin construction of its Kearl oil sands mine, marking the first major oil project to be announced in Alberta since the economic crisis swept away billions in planned spending.
The company's board of directors has approved the first 110,000 barrel-a-day phase, with a price tag of $8-billion, Imperial said Monday morning. Production at the mine, located 70 kilometres north-east of Fort McMurray, is expected to start in 2012.
Approval of Kearl had been widely anticipated, with Imperial sending out a flurry of construction bid requests in the past month and company chief executive officer Bruce March dropping broad hints that an announcement was forthcoming.
Still, a major new spending plan serves as a much-needed vote of confidence in the oil sands, which have been slammed first by surging construction costs, then falling crude prices and a credit crisis, and now, uncertainty stemming from greenhouse gas regulations in the U.S.
The hefty cost of developing the oil sands makes them ripe for consolidation by the world's supermajor oil producers, but with the exception of Total SA, the threat of costly environmental regulations has made them leery of pursuing further acquisitions, Calgary investment bankers say.
However, Imperial is 70 per cent owned by the Exxon Mobil Corp., whose deep pockets have given it the freedom to build during the downturn.
Though construction costs in the oil sands have fallen substantially in recent months, Kearl's current $8-billion price tag is still well above Imperial's 2004 estimate of $5-billion to $8-billion – an estimate that included money needed to build a facility to upgrade bitumen into a product that is easier to refine. The company no longer plans to build an upgrader with its first phase.
According to FirstEnergy Capital analyst William Lacey, at a construction cost of $8-billion, Kearl would need oil prices around $80 a barrel to be profitable.