UPDATE 2-Imperial to go ahead with C$8 bln Kearl project

* To proceed with 110,000 bpd stage

* Expects production by late 2012

* Pegs cost at C$8 bln, or C$4.50 per barrel

* Shares rise less than 1 pct (Adds details, comments)

By Scott Haggett

CALGARY, Alberta, May 25 (Reuters) - Imperial Oil Ltd (IMO.TO) on Monday said it would go ahead with its C$8 billion ($7.1 billion) Kearl oil sands project, the first major new development to be approved in the region of northern Alberta since the recession forced a spate of cancellations.

Imperial, Canada's biggest oil exploration and refining firm, said it expects to complete the mining project's first 110,000 barrel per day stage by late 2012.

"It's a big project and it's a high-quality oil sands resource," said Gordon Wong, a spokesman for the company. "It's a very exciting day for Imperial."

Future expansions could boost production from the site north of Fort McMurray, Alberta, to 300,000 barrels a day.

Imperial, 69.9 percent owned by supermajor Exxon Mobil Corp (XOM.N), was widely expected to proceed with Kearl despite an industry downturn that forced the cancellation of at least C$90 billion worth of rival projects.

However, Imperial has been relatively unscathed by the economic turmoil that has pushed oil prices from their July 2008 high of more than $147 a barrel to a recent $61.25. The company is debt free and had nearly C$2 billion in cash on hand at the end of 2008.

Alberta's oil sands contain more than 170 billion barrels of recoverable crude but the resource is technically difficult and expensive to extract.

The tar-like bitumen stripped from the sand must also be upgraded before it is usable. Most major projects include upgraders to turn the bitumen into refinery ready synthetic crude but Imperial plans to sell the bitumen directly to refineries.

Imperial's plans have been aided by a big drop in labor and material costs that have come as rival projects fall by the wayside. Indeed, the downturn in northern Alberta could lower the C$4.50 per barrel cost even further.

"They've got no debt and can execute on a major oil sands project in an environment where costs look to be trending down," said Chris Feltin, an analyst at Tristone Capital. "If they are able to lock in even lower rates than they are estimating now there may be some opportunity for that C$8 billion (estimate) to come in even lower."

The Kearl project will be Imperial's third major oil sands investment. It holds a 25 percent stake in Syncrude Canada Ltd, the biggest oil sands producer, and operates the Cold Lake oil sands project, which produces around 150,000 barrels a day.

Imperial will own 70 percent of the Kearl project while Exxon Mobil holds the remaining stake.

Imperial shares were ahead 11 Canadian cents at C$42.15 by midday on Monday on the Toronto Stock Exchange.

($1=$1.13 Canadian) (Reporting by Scott Haggett; editing by Rob Wilson)