Canadian Natural Resources Ltd and its partner, North West Upgrading Inc, said on Thursday they are proceeding with a C$5.7 billion ($5.7 billion) oil sands upgrading plant in Alberta at a time when some of their rivals are slowing down spending over fears of high costs.
Canadian Natural also reported a sharper-than-expected 57 percent drop in third-quarter profit and cut its output forecast. Shares of the country's larges independent oil explorer and producer slid 4 percent.
Canadian Natural and privately held North West plan to build the plant near Edmonton, starting construction in the spring of next year.
The facility, which has been on the drawing board for eight years, will process extra-heavy crude from the tar sands into low-sulfur diesel fuel and other petroleum products. The initial capacity will be 50,000 barrels a day and it could eventually be expanded to 150,000.
The green light comes at a time of growing fear that cost overruns and delays that plagued the Alberta oil sands industry before the financial crisis of 2008 and 2009 could creep back as development of the massive resource accelerates.
The oil sands sector also faces increasing competition from surging volumes of unconventional light crude supplies from regions such as the North Dakota Bakken.
Indeed, Suncor Energy Inc said last week it was holding off on construction of its 200,000 barrel a day Voyageur upgrader, a joint venture with France's Total SA that had been slated to start operations in 2016, citing the explosion in unconventional crude output.
However, Canadian Natural and North West plan to produce petroleum products at their refinery, rather that just synthetic oil that would be shipped to other North American refineries.
In addition, the Alberta government, as part of an initiative to foster more valued-added processing within the western Canadian province, will supply 75 percent of the feedstock for the plant with crude it gets in lieu of cash royalty payments. Canadian Natural will supply the rest from its own production. The processing agreements have 30-year terms.
"Suncor doesn't have a locked-in return with the government. This is a government-based project that has a locked-in guaranteed minimum return. So the minimum return suggests you should spend the money and that's the case for them here," said Phil Skolnick, analyst with Canaccord Genuity.
In the third quarter, net income fell to C$360 million, or 33 Canadian cents a share, from year-earlier C$836 million, or 76 Canadian cents per share. It blamed the drop on lower realized prices for oil and gas.
Analysts, on average, had expected 50 Canadian cents according to Thomson Reuters I/B/E/S.
Cash flow, an indicator of the company's ability to pay for its expansion plans, fell 19 percent to C$1.43 billion, or C$1.30 a share, for the third quarter.
Production rose 9 percent to 667,616 barrels of oil equivalent a day.
The company said it expects to produce between 452,000 and 460,000 barrels a day of crude oil and natural gas liquids or 2012, down from its previous forecast of between 454,000 and 474,000.
Canadian Natural also cut its output forecast for the Horizon oil sands project in Alberta that was under maintenance for 12 days last month.
The production forecast cut is the result of a C$230 million reduction in spending in the quarter, bringing the year's budget cuts to C$910 million, or 12 percent, to cope with weak pricing, Canadian Natural said.