CALGARY - The first phase of Imperial Oil Ltd.'s Kearl oilsands mine will cost $2 billion more than its most recent estimate as the company faced issues transporting Korean-made modules to the mine site in northern Alberta and contended with harsh weather during startup.
This is the second cost increase for the $12.9-billion project. Its initial price tag was $7.9 billion in 2009, later raised to $10.9 billion two years later when changes were made to its scope and design.
Taking into account a second $8.9-billion phase in the works, the whole development is expected to have a cost of $6.80 per barrel, up 10 per cent from a prior estimate of $6.20.
When the Calgary-based firm (TSX:IMO) announced in 2009 that it would build the Kearl mine, it expected three phases of roughly the same size. Later, it decided to build the mine in two phases, with smaller projects along the way to boost output in increments.
The cost overrun is likely to have an impact on the reputation of Imperial, and its U.S. parent company ExxonMobil Corp., as "premium" operators, wrote CIBC analyst Andrew Potter in a note to clients.
Imperial faced legal and regulatory delays in bringing enormous pieces of equipment to the mine site, which were shipped across the Pacific and then through the United States and Canada by river barge and truck.
The 200 modules had to be broken up into smaller pieces so that they could be transported along interstate highways and then put together again near Edmonton.
"This was an enormous work effort... involving hundreds of workers for more than a year," said Imperial spokesman Pius Rolheiser.
Imperial rejigged the order in which the work was conducted so that it wouldn't be thrown completely off schedule.
But that meant commissioning and startup activity timelines were "compressed" and had to take place during harsh winter weather.
"We've been dealing with minus 40 (degree) weather at times and that necessarily has an impact from a safety perspective on how employees can work," said Rolheiser.
In the end, Imperial expects Kearl to start churning out bitumen during the first three months of this year, a bit later than its previous late 2012 target.
Potter said there's still some risk to the schedule.
"We would not be surprised to see production not starting up until May," he wrote.
Despite the challenges, Kearl remains a "very, very attractive project" that will produce oil for four or five decades, Rolheiser said.
The cost estimate of the second phase remains at $8.9 billion and is not at risk of being jacked up by the same factors that affected the first.
"With the exception of that one unnecessary external factor — the module transportation delays, which couldn't have been anticipated and over which we had no control — the execution of the Kearl initial development was exemplary from a productivity standpoint, most importantly form a safety standpoint," said Rolheiser.
Also Friday, Imperial reported a seven per cent increase in net income in the fourth quarter as lower expenses more than offset a decrease in revenue.
Imperial, a publicly traded subsidiary of Houston energy heavyweight ExxonMobil Corp. (NYSE:XOM), said net income in the last three months of 2012 was $1.07 billion or $1.26 per share, above 2011's $1.01 billion, or $1.18 per share.
It also handily beat analysts estimates of 99 cents per share, according to Thomson Reuters.
Revenue fell to $7.8 billion from $8.1 billion, in line with estimates. However, expenses also dropped to $6.39 billion from $6.86 billion.
In afternoon trading on the Toronto Stock Exchange, Imperial shares were down two cents at $43.78.