Teck Cominco's Oil Sands Costs Jump 50 Percent

(MoneyWatch) 

• The Company: Teck Cominco Limited, a diversified mining company.
• The Filing: Form 6-K filed with the SEC on September 17, 2008.
• The Finding: Teck Cominco Limited said its share of capital costs for the first phase of the Fort Hills oil sands project, of which it owns a 20 percent working interest, is now pegged at $4.2 billion, up $1.84 billion from an initial June 2007 cost estimate. The tar sands project is a critical component of the metals and mining company's diversification strategy to hedge asset volatility (by moderating exposure to cyclical swings in any given commodity, such as copper or zinc).

The Upshot: The $21 billion project, as currently conceived, consists of an integrated oil sands mine and bitumen extraction plant 90 kilometres north of Fort McMurray, Alberta, and an upgrader in Sturgeon County northeast of Edmonton, Alberta. The two other partners in the Fort Hills Energy L.P. are Petro-Canada and UTS Energy Corporation, with a 60 percent and 20 percent working interest, respectively. Petro-Canada Oil Sands Inc., a wholly owned subsidiary of Petro-Canada, is the contract operator for the project.

The first phase of the project, expected to begin production in the fourth quarter of 2011, is planned to yield 140,000 barrels per day (b/d) of synthetic crude oil. The company's 20 percent share-net in Fort Hills holds an estimated 700 million barrels of synthetic crude oil equivalent reserves.

Scheduled to come online by 2014, a second phase called for doubling production to a total of 280,000 b/d of synthetic crude oil. Given the latest engineering news on escalating costs for phase one, the preliminary aggregate price tag of $12.1 billion for the mine and upgrading components of the second phase of the project would likely double.

The Question: Could rising construction costs, falling oil prices, and/or turmoil in the credit markets delay -- or lead to a cancellation -- of the entire project, or at least call into question the economic viability of the planned second phase?