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Canadian Natural Resources Ltd.’s Horizon oil sands project. An Italian engineering company is suing CNRL for at least $213-million, claiming unpaid bills and the early termination of a contract tied to construction of the company’s massive Horizon oil sands project.

One of the world's biggest engineering firms is suing Canadian Natural Resources Ltd. for at least $213-million, claiming unpaid bills and the early termination of a contract tied to construction of the company's massive Horizon oil sands project.

Italy's Saipem SpA said in court documents that it initially agreed to a $480-million lump-sum contract to construct a major piece of processing equipment for the Horizon expansion, but that CNRL terminated the agreement early with insufficient cause.

In its statement of claim, filed in the Alberta Court of Queen's Bench in Calgary, Saipem also alleges that CNRL demanded numerous design changes – from fresh paint jobs to new covers for transformers – during construction that "materially" increased costs and caused delays.

The legal action exposes tensions between oil companies and their suppliers as skidding global crude prices undermine the profitability of big-ticket projects conceived at the top of the market.

CNRL already had a reputation as a tough dealer with suppliers and contractors. Meanwhile, the collapse in oil prices has hurt revenues, forcing it and rival companies to hunt for cost savings in northern Alberta's oil sands and across their operations.

"The consensus in the industry is that they drive hard bargains," said Rob Bedin, an analyst at RS Energy Group in Calgary. "If you want to work for them, you've got to screw your costs down as low as you can – in some cases lower than is reasonable. But that's how they play the game."

Saipem, among the top 10 global energy construction firms, said it agreed to build the phase 2B hydrotreater in 2011. The equipment, which is designed to remove sulphur and other undesirable compounds in the bitumen upgrading process, was to be a "carbon copy" of a unit that it constructed at Horizon between 2005 and 2008. The prospect promised little engineering time and effort, the contractor said.

The agreement included a scheduled completion date of June 1, 2015. However, according to the claim, a host of design changes demanded by CNRL and a "dysfunctional" process for reviewing them made the deadline impossible to meet. Saipem said CNRL executives had said it would be acceptable to push the deadline to April, 2016.

But on Dec. 23, 2014, CNRL issued a formal notice to Saipem that it was in default of the agreement, even though, the contractor claims, it was not. Rather, the delays were the fault of CNRL, not itself, Saipem alleges. At the time, U.S. oil prices had fallen to about $57 (U.S.) a barrel, from more than $100 just a few months earlier.

"CNRL's treatment of Saipem was, at best, a termination of the Phase 2B agreement for convenience, and at worst, a breach of CNRL's contractual and common-law duty of good faith and honest performance of the Phase 2B agreement," Saipem said in its claim.

The company said it billed CNRL $370.7-million (Canadian) for the work it completed, but pointed out that its actual cost was $509.2-million.

The allegations have not been proven in court and CNRL has not filed a statement of defence. A spokeswoman for the company declined comment. CNRL has repeatedly touted productivity gains as it nears completion of the mine expansion, slated to add 45,000 barrels per day of new capacity this fall.

Last year, CNRL president Steve Laut told The Globe and Mail that savings included making its own diesel fuel to run equipment and trucks at the site. "We're using better execution strategies and that makes it more effective," he said.

Still, oil prices have come under renewed pressure and remain well below levels analysts say most oil sands companies need to generate healthy returns. Numerous expansions have been shelved to cope with sinking profits.

According to Saipem, it faced $2.5-million in extra costs for diesel generators after CNRL failed to provide temporary power to its work site. The company said that CNRL directed it to remove grating that was already installed on modules and have it painted, a process that required shipping it to Edmonton. That added $550,000 to expenses and meant a two-month delay, the contractor said.

Saipem also said it spent an additional $650,000 to remove aluminum cladding from transformers that was identical to that used in the initial unit, and replace it with stainless steel material. That pushed back the timetable by seven weeks, the company said. The claim includes numerous other alleged incidents.

Such friction is a common byproduct of so-called lump-sum contracts, said Mr. Bedin of RS Energy Group. They can prove especially unwieldy on a large project with multiple contractors, and leave little room to deviate from the agreed-upon blueprints. "It sets up a competitive situation," he said.

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Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:15pm EDT.

SymbolName% changeLast
CNQ-N
Canadian Natural Resources
+1.13%76.32
CNQ-T
Canadian Natural Resources Ltd.
+0.87%103.33

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