Fort Hills oilsands project cost pegged at $14.1B

The consortium behind the Fort Hills oilsands projectwill forge ahead with the next stage of the development, despite a preliminary cost estimate of $14.1 billion for the first stage.

That amountis expected to coverdevelopment and construction of the first phase of the mine andupgrading components of the project. The mine is 90 kilometres north of Fort McMurray,Alta., while the upgrader will be in Sturgeon County, near Edmonton.

A second stage, if approved, would cost another $12.1 billion.

Petro-Canada revealed the costThursday as it announced the Fort Hills partnershipwould proceed with engineering and design studies that are expected to take a year.

Only then will the three partners in the mega-project Petro-Canada, UTS Energy Corp. and Teck Cominco Ltd. decide on a final go-ahead.

The"go" or "no go" decision willdepend on the final cost estimate. As with all oilsands projects in Alberta's north, energy companies have been struggling to get spiralling construction costs under control.

"The size, staging, and technology chosen should provide solid financial returns while minimizing execution risk," Petro-Canada Chief ExecutiveRon Brenneman said.

"This step puts us on path for a final go-ahead project decision in the third quarter of 2008.''

Assuming the first phase of the Fort Hills project is fully developed, it's expected to produce 140,000 barrels of synthetic crude oil every day by 2012. Once all phases are in operation by 2015, daily production is expected to double to 280,000 barrels.

The Fort Hills project is 55 per cent owned by Petro-Canada, which is the project operator. UTS Energyhas a 30-per-cent interest and Teck Cominco has the other 15 per cent.

The Fort Hills mine was approved by the Alberta government in 2002. At that time, the project was operated by True North Energy, a subsidiary of a U.S. private company. But it decided in early 2003 not to proceed with it because of rising costs.

Since then, costs have riseneven more. But oil prices are much higher now, too, making thesignificant costs of heavy oil upgrading more feasible for operators.

Analyst Rob Bedin of the Ross Smith Energy Group said with oil now around $70 US a barrel and Petro-Canada's estimates based on $45 US oil, the Fort Hills project could bemore profitable than first thought.

"I would think that internally, they'dbe looking at higher prices than that," he told CBC News."I would think that the consensus generally would be that prices willbe higherthan $45 [US] going forward."