Exxon Mobil (NYSE:XOM) Taps Alberta Oil Sands

Brian Hicks

Written By Brian Hicks

Posted April 30, 2013

Saturday marked the initial start-up and production phase for Imperial Oil Ltd. (NYSE:IMO) and its partner Exxon Mobil (NYSE:XOM) at their Kearl oil sands project in Alberta, Canada.

Production capability is estimated to be 4.6 billion barrels of oil over the next 40 years. This is a large and unique undertaking for Exxon, the world’s largest oil company by market value, and its subsidiary Imperial; the project is large in scale but unique because it will utilize technology to alleviate concerns over emissions that are typical in other oil sands projects.

Alberta Oil Sands Sulphur PilesThis initial phase is slated to cost $12.9 billion, up from an estimate late last year of $10.9 billion and, according to the GlobalPost, up $5 billion from its onset estimate of $7.9 billion.

The news comes just days after the two companies reported first-quarter earnings.

Texas-based Exxon came out higher than some analysts had expected, with a $9.5 billion profit on sales of $108.8 billion. The company is up 2.4% this year.

Calgary-based Imperial saw a drop in net income to $798 million on revenues of $8.01 billion, as Bloomberg reports, and this was slightly less than analysts had anticipated. A price drop on heavy crude and the widening price gap between Canadian heavy oils and U.S. light oil is a major cause. Still, yesterday Imperial closed up yesterday.

Imperial Combat

Much of the reason for the fallout from Canadian oil is infrastructure, or lack thereof. The one problem: the consistent lack of pipeline from Western Canada into the U.S.

Imperial has plans to avoid selling its Kearl oil at lower prices comparable to the U.S. benchmark by utilizing refineries owned by both Imperial and Exxon. Imperial, who is majority-owned (70 percent) by Exxon, will also secure transport through rail to avoid the hassle limited pipeline.

From Bloomberg:

“Kearl is a historic development for Imperial,” Richard Kruger, Imperial Oil’s chief executive officer, said in a statement. “Kearl is the largest project we’ve ever undertaken and the beginning of a period of substantial growth for the company that will see us double production to more than 600,000 barrels per day by about 2020.”

Rougher estimates have the Kearl reaching full capacity at around 345,000 barrels per day by 2020.

Either way, transport will prove crucial as production soars, and with that security, Imperial can battle other factors impeding its progress. It claims that the costs of the $12.9 billion project were raised due to concerns of “harsh weather.” But the company has also ran into problems delivering equipment, overall cost overruns, and it faced protests from U.S. residents in Montana over traffic en route to Alberta.

Kearl and the Oil Sands

The Kearl oil sands are located in the Athabasca region of northeastern Alberta. The project will initially produce 110,000 barrels per day and steadily increase, more than doubling in two years’ time.

This is such an important project, not just for its size but also because it will utilize technology that will process the oil sands at facilities designed to cut emissions. These facilities will also lower operating costs associated with crude produced from oil sands operations.

Environmental groups typically have a field day with oil sands and its developers. The production is a much more carbon-intensive process than with other types of oil operations, and it can be dangerous because it is more corrosive than conventional forms of crude oil.

This has become one of the key issues in resistance to the construction of a pipeline—more notably the Keystone XL pipeline for which the U.S. is reluctant to grant approval. If this oil were to ever spill, its heavy consistency makes remediation much more troublesome.

But the XL pipeline, which only needs the go-ahead from President Barack Obama, would solve many of the oil company’s dilemmas. TransCanada Corp (NYSE:TRP), the company that would build the pipeline, could transport roughly 830,000 barrels per day, much of which would be oil sands crude headed to the U.S. Gulf Coast.

The improvements Imperial claims in advanced technology puts a microscope on the Kearl operation and could eventually set it apart from others in a positive light.

Companies in Alberta

Imperial and Exxon are also working on other projects while the Kearl takes off. They are in the early stages of looking to export liquefied natural gas (LNG) where they have large holdings in the Duvernay formation in Alberta, as well as in the Montney in British Columbia.

Pipeline company Plains Midstream Canada recently found itself in hot water over a 2011 spill from its Rainbow oil pipeline in Alberta. The company could face over $1.5 million in fines.

Plains All American Pipeline (NYSE:PAA), its parent company, had a similar spill on the same pipeline in 2006 at its Edmonton section.

One firm, Cenovus Energy Inc. (NYSE:CVE), was warned last week that it likely will not last in Alberta.

But Imperial and Exxon are forging ahead with the Kearl oil sands project, and with new processing technology and the nearing of U.S. approval on the Keystone XL pipeline, crude in Alberta is flowing just fine.


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