UPDATE 2-Canadian Natural says Horizon project costs mounting

(Adds details, comments. Changes dateline, previous TORONTO)

By Scott Haggett

CALGARY, Feb 12 (Reuters) - Canadian Natural Resources Ltd (CNQ.TO) said on Tuesday costs for its Horizon Oil Sands Project have risen to as much as C$8.7 billion, C$1.9 billion more than initial estimates, as severe cold at its northern Alberta project site hampered construction.

The company, Canada's No. 2 oil explorer, said construction at the site north of Fort McMurray, Alberta, was 90 percent complete and Horizon remained on track to open in August, as it decided to spend the additional cash in order to stick to the schedule.

"We are now estimating capital costs...to be approximately 25 to 28 percent over our original budget of C$6.8 billion," John Langille, Canadian Natural's vice chairman, said on a conference call. "

It's the third time that Canadian Natural has raised its cost estimate for the 110,000-barrel-per-day project, which includes an oil sands mine and an upgrader to convert the tar-like bitumen stripped from sand into refinery-ready synthetic crude.

In October, the company expected costs to be as high as C$7.5 billion.

Blowing through budgets is routine in Canada's oil sands region. Every major project built to exploit the biggest reserves outside of Saudi Arabia has faced massive cost overruns due to rising prices for equipment and materials and a shortage of skilled labor.

Even with the mounting costs, Canadian Natural said the final tab for the initial phase of Horizon will run to about C$80,000 per barrel of daily production, 20 percent less than the costs faced by rival oil sands mining projects.

"Despite the higher costs this is still a very robust project," said Kyle Preston, an analyst at Salman Partners. "Comparing it to other projects this is one of the cheaper integrated mining projects. It still has very robust economics."

Preston said with oil prices running above $90 a barrel, it wouldn't take the company long to recover the cost overrun.

Indeed, Canadian Natural said on Tuesday it expected its operations this year to generate cash flow of up to C$5.8 billion, up from an initial forecast in November of up to C$5.1 billion, amid higher than expected oil and natural gas prices.

The company said bitterly cold weather in northern Alberta slowed progress. Temperatures in the oil sands region were below -40 Celsius (-40 Fahrenheit) last month. Indeed, Syncrude Canada Ltd, the biggest oil sands producer, had to shut down operations in late January after instruments froze.

"The last 10 percent of any project is the toughest and most labor intensive," said Steve Laut, Canadian Natural's president. "In January and February we've had some periods of extreme cold, much colder than forecast. This has hurt progress, But outside of this cold weather we have seen a significant deterioration in labor productivity."

The spending on Horizon's initial phase includes some work and equipment for future planned expansions at the site that will boost output to 232,000 barrels a day.

Canadian Natural shares, which have risen 7.2 percent over the past 12 months, climbed 27 Canadian cents to C$63.03 on Tuesday morning on the Toronto Stock Exchange.

($1=$1 Canadian) (Additional reporting by John McCrank; Editing by Bernadette Baum)