"Financially, Canadian Natural is strong. We have built our financial plans around a US$28/bbl WTI benchmark price, under which we would expect a peak debt to debt plus equity ratio of less than 45% in 2008. In order to gain further financial flexibility we have actively engaged in a commodity hedging program which will ensure prices higher than US$28/bbl on a substantial portion of our production for 2005 and 2006."
"Returns on capital are robust at 15% in a US$28/bbl WTI world, and importantly, once completed, we expect free cash flows in excess of $1.6 billion to be generated from the Horizon Project every year for the next forty years. The consistency of this cash flow will significantly change the risk profile of the Company and when combined with our exceptional conventional oil and natural gas assets will transform Canadian Natural into one of the most sustainable independent energy companies in the world."
The Horizon Oil Sands Project
The Horizon Project is designed as a phased development and includes the mining of bitumen combined with an onsite upgrader. Phase 1 production is planned to begin in the second half of 2008 at 110,000 bbl/d of 34 degree API light, sweet synthetic crude oil ("SCO"). Phase 2 would increase production to 155,000 bbl/d of SCO in 2010. Phase 3 would further increase production to 232,000 bbl/d of SCO in 2012. The phased approach provides the Company with improved cost and project controls including labour and materials management, and directionally mitigates the effects of growth on local infrastructure.
Based upon stratigraphic drilling to date, the Company's oil sands leases located near Fort McMurray, Alberta contain an estimated 6 billion barrels of potentially recoverable bitumen using existing mining and upgrading technologies. Additional in-situ potential also exists on the western portions of the leases. The first three phases of the Horizon Project, which encompasses only a portion of these oil sands leases, will deliver in excess of 40 years of production without the declines normally associated with petroleum operations. Gilbert Laustsen Jung Associates Ltd., an independent third party petroleum consultant firm, was retained by the Reserves Committee of Canadian Natural's Board of Directors to evaluate reserves associated with the Horizon Project. Their report estimated that 3.3 billion barrels of proved and probable bitumen reserves are located on the leases associated with the first three phases of the Horizon Project.
Construction Costs and Economics
Total expected capital costs for all three phases of the development are estimated at $10.8 billion. Capital costs for the first phase of the Horizon Project are estimated, including a contingency reserve of $700 million, at $6.8 billion with $1.4 billion to be incurred in 2005, and $2.2 billion, $2.0 billion and $1.2 billion to be incurred in 2006, 2007 and 2008, respectively. When the Horizon Project is fully commissioned, operating costs, including sustaining capital, are expected to be in the range of $14.00 to $14.25 per barrel. Current product pricing, capital and operating cost estimates for the project show an internal rate of return of 15% to 22% based upon long-term average WTI assumptions of US$28 to US$40 per barrel. Once all three phases of production are in place, incremental free cash flow from operations is estimated to be between $1.6 billion and $2.5 billion or $6.00/share to $9.00/share.
Given the high level of project definition the Company has been able to secure lump sum "engineer, procure and construct" ("EPC") contract price and unit price bids for approximately 68% of Phase 1 capital costs, allowing the Company to achieve a high degree of cost certainty. To further mitigate risks associated with sole supplier arrangements, the Company has broken its Phase 1 construction efforts into 21 distinct parcels ranging in value from $10 million to $700 million. To date approximately $2.2 billion of these parcels have been awarded to suppliers and contractors or 32% of total Phase 1 capital costs.
Current activity at the Horizon Project site includes site preparation, installation of deep undergrounds and construction of onsite access roads, and construction camps. Canadian Natural currently is utilizing the services of 1,280 people working on the Horizon Project; including 330 people on site, 350 employees in its Calgary office and an additional 600 people employed by engineering firms working together on the effective execution of the project.
Financing of the Project and Revised Hedging Policies
Canadian Natural is committed to maintaining its strong financial position throughout construction of the Horizon Project. The Company has built the necessary financial capacity to complete the Horizon Project while at the same time not compromising delivery of exceptional low risk conventional oil and natural gas growth opportunities.
Canadian Natural exited 2004 with a debt to debt plus equity ratio of approximately 34%, debt to EBITDA ratio of less than 1 times and unused bank lines of $2.8 billion. To provide additional financial capacity to the Company, in December 2004, Canadian Natural executed a $1.5 billion Horizon Syndicated Credit Facility which has a fixed term of five years plus three one year extension options.
The Company continues to execute its defined growth plan to deliver production growth at 10% per annum while requiring less capital allocations to its conventional oil and natural gas business during the capital expenditure period of Phase 1 of the Horizon Project. Existing proved development projects, which have largely been funded prior to December 31, 2004, such as Baobab, West Espoir and Primrose provides identified growth in production volumes in 2005 and 2006, and will generate incremental free cash flows during the period 2005 to 2008 with which to finance the Horizon Project. Free cash flows which will be generated from Phase 1 of the Horizon Project operations will be sufficient to finance Phase 2 and 3 expansions.
Furthermore, in an effort to reduce the risk of volatility in commodity price markets and to underpin the Company's cash flow through the Horizon Project construction period, the Board of Directors of the Company in January 2005 authorized an expanded hedging program for Canadian Natural. This expanded program allows for up to 75% of the near 12 months estimated production, up to 50% of the following 13 to 24 months estimated production and up to 25% of production expected in years 3 and 4 to be hedged. This revised hedging program allows the Company to have greater stability to its free cash flow and enhances the Company's financial flexibility during the Horizon Project construction years. The Company currently has collar hedges covering approximately 71% and 30% of estimated 2005 and 2006 crude oil production respectively. Similarly, approximately 67% and 25% of estimated 2005 and 2006 natural gas production have been hedged.
. Note: All amounts in Canadian dollars unless otherwise stated.
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