UPDATE 2-Imperial says Kearl oil sands cost rises by C$2 billion

Fri Feb 1, 2013 1:18pm EST

* Kearl budget rises by C$2 bln to C$12.9 bln

* Company expects first oil from site by end-Q1

* Extends deadline for sale of Dartmouth, N.S., refinery

* Q4 EPS C$1.26/shr vs year-earlier C$1.18/shr

* Shares rise 0.4 pct

By Scott Haggett and Ankur Banerjee

CALGARY, Alberta, Feb 1 (Reuters) - Imperial Oil Ltd said on Friday the cost of its recently completed Kearl oil sands project in northern Alberta ballooned to C$12.9 billion ($12.9 billion), nearly 20 percent above its last estimate, because of transportation delays and a harsh winter.

The company, which also reported a 7.1 percent rise in fourth-quarter profit, said a series of court challenges in the U.S. Pacific Northwest that delayed the transport of foreign-made processing modules to the site forced a change in construction schedules and increased costs.

The final cost of the 110,000 barrel per day oil sands mine is C$2 billion above Imperial's last estimate, in 2011, and nearly two-thirds higher than its initial 2009 forecast of C$7.9 billion.

Every major mining project in the Alberta oil sands, the world's third-largest reserve of crude oil, has suffered substantial cost increases. But analysts cautioned that Imperial's blown budget is not an indication that the sector is again experiencing the hyper-inflation that plagued oil sands projects before the financial crisis, when companies were competing for materials and a limited supply of skilled labor.

"It's these issues with the modules being delayed in the U.S. ... and then it got cold earlier than expected," said Michael Dunn, an analyst at FirstEnergy Capital Corp. "Whenever you run into delays right at the end (of construction) that's when the costs hit because you have everyone on site and productivity drops, especially in the cold. ... It's not necessarily a good barometer for cost escalation."

FIRST OIL DELAY

Imperial, majority owned by Exxon Mobil Corp, said it expects to begin producing bitumen at Kearl by the end of the first quarter, reaching full output "over the next several months".

The company has revised forecasts for the start of production at the site repeatedly. The start was originally slated for December and then extended over recent weeks as temperatures in the Fort McMurray, Alberta, region dipped close to -40 Celsius (-40 Fahrenheit). Some observers are pessimistic that Imperial will be able to meet its latest target.

"We would not be surprised to see production not starting up until May," said Andrew Potter, an analyst at CIBC World Markets.

Oil traders have said that expectations of production from the Kearl development have been a factor in the deepening of discounts on prices for Canadian heavy oil, as export pipeline capacity remains limited in the face of increased oil sands output.

With Imperial delaying production, the discount for Western Canada Select heavy oil, compared with the U.S. West Texas Intermediate benchmark, has narrowed in recent weeks from more than $40 per barrel to just over $30 on Friday.

Despite the delays and cost increases, the company has already begun work on doubling the size of Kearl. The C$8.9 billion Kearl expansion project, which will also be co-owned by Imperial and Exxon Mobil, is ahead of schedule and expected to be complete in 2015.

DARTMOUTH REFINERY SALE

Imperial also extended its deadline for the sale of its 82,000 bpd refinery in Dartmouth, Nova Scotia, beyond the first quarter.

The company put the facility on the block last year as the high cost of processing expensive sea-borne crudes cut into the refinery's profits.

Imperial said a number of potential buyers have expressed interest in the refinery, but a final decision may not come until later in 2013.

Imperial said its fourth-quarter earnings rose to C$1.08 billion, or C$1.26 a share, from C$1.01 billion, or C$1.18 a share, a year earlier, helped by higher refining margins due to cheaper inland North American crude prices.

Revenue fell 4 percent to C$7.8 billion.

Production dropped to an average of 285,000 barrels of gross oil-equivalent per day, from 291,000 a year earlier.

Imperial shares were up 18 Canadian cents at C$43.98 at midday on Friday on the Toronto Stock Exchange.