Good Q & A from the conference call. The upside here is streaming.
Joe Citarrella - Goldman Sachs
In terms of just following up on Horizon here on future phases is, we are waiting for more detailed cost estimates. I was hoping you could offer some early thoughts on how you expect costs to compare to the first phase. I mean, should we be thinking about close to the $88,000 per barrel a day that we had from Phase 1 or anticipating anything meaningfully different here? Thank you.
Steve Laut
I think Joe, right now we're still in the final stages of it. We're kind of in a unique window right now. And the cost estimates that we've had before may look a little high compared to what we are able to execute in this environment.
However, a concern is, once you start announcing projects, we could get the industry as a whole back into that inflationary period, and we would have cost pressures again. So all our execution strategy is built around giving us the maximum flexibility and the ability to control cost and stop and start as we go forward.
As far as $88,000 or $89,000 which we did Phase 1 for, I think it would be difficult to achieve that level of cost going forward in expansions.
So, it will be higher than the $89,000 in Phase 1. Just how much higher, we haven't nailed down exactly yet.
Joe Citarrella - Goldman Sachs
Got it. And similar lines on Kirby, hoping you just provide some additional color there. I mean, you're expanding the whole project to 70,000 to 100,000 per day now, and you mentioned capital of about 31,000 for the first phase. Should we be thinking about a lower capital spend for the remainder of the project given expected synergies? And also any thoughts on timing for production here? Thank you.
Steve Laut
So Kirby Phase 1, (first) team and his 23rd team, and then the oil will come up you know around let's say, (diesel) won't be like cyclic where it comes out at you right away. So it will take some time, probably in 2014 when we start production.
As far as costs going forward for the expansion on Kirby Phase 2 and the de-bottlenecking we'd expect to be able to leverage the infrastructure we've built here for Kirby Phase 1. And the de-bottlenecking for sure will give us better cost energies. So we think it will be lower.
At this point in time, we haven't quantified how much lower that will be, but we expect it to trend lower for future expansions. We'd also expect to see operating cost to be a little bit lower with expansions.
Operator
Our next question is from Mark Polak from Scotia Capital.
Mark Polak - Scotia Capital
A quick question for you. Now that you've acquired the (interspersed) lands around Kirby, that expansion and the bottleneck, should we think about that sort of pushing out Grouse and all the other projects a little further and sort of coming on in that 2016 timeframe?
Peter Janson
That's a good question. Mark, we're still looking at it. What we're planning to do with both Grouse and Birch Mountain East is that we're looking now at the possibility of making regulatory applications for both of those in 2011 and trying to put Kirby 2 in there in between. So we're not sure exactly how the schedule would be, but there maybe some juggling of schedules. You would think just logically Kirby 2 would probably become before; however, Grouse is looking very good, so we may try to do Grouse first or very close together with Kirby 2.
Mark Polak - Scotia Capital
Okay, but no chance to the overall, kind of adding 30,000 to 60,000 barrels at average 2 to 3 years? Is that still sort of the pace you are comfortable with?
Peter Janson
We are very comfortable with that pace, and we think basically the contracting and construction market can handle that. If we get going too far, you are going to outrun the construction market and overrun the engineering firm's ability to deliver for you.
Mark Polak - Scotia Capital
And just curious what you are seeing in terms of inflation as you're working through the latter stages of, you know, looking at Horizon here we've seen costs go up on (curl), and some (inaudible) mentioned this morning that after a fairly sharp reduction and the slowdown of '08, '09 costs are coming up, so you are getting busy as you look at that pipeline. Just curious what you're thinking there?
Peter Janson
We are Mark, concerned about inflation and about the ability to reignite inflation. I will say that on our projects on Tranche 2 we are tracking below our control estimate or cost estimate at this point in time and that's one of the reasons why we reduced capital spending in 2010 because of their ability to do their work with less. So we are seeing our ability to do it for less, and we (constricted). But going forward, I think it's all a matter of activity. So it becomes very difficult to say that going forward you're going to be able to do it for less. But we haven't seen inflation yet on that side.
Operator
Our next question is from George Toriola from UBS Securities.
George Toriola - UBS Securities
The question is around operating costs in the North Sea. Obviously in the quarter, you had some other issues. But just looking at that business, where would you expect operating costs to be, and what are the drivers you have to the extent that you can bring costs down, what drivers do you have?
Doug Proll
The biggest driver in the North Sea for operating costs are the production volumes. Mostly operating costs are essentially fixed. So we didn't have as we had in the third quarter all the turnarounds, and that's the time to do it is in the summer and the water conditions are better. Your production's down and your operating costs go up significantly.
So for us, maintaining production volumes is the biggest driver, and increasing volumes if we can. As you know, we started up a drill string in Ninian this year. Obviously we took a hiatus in 2009. Mainly because of the uncertainty in the global financial market, we want to reduce our capital spending. As a result, there's a lot of safety-critical work we have to do here in 2010 and 2011 we had to get to before we get to really see some of the juicier production volume adds. So as we get to that we'll see production more stable and operating costs stabilize as well.
George Toriola - UBS Securities
Sort of, where do you expect that to settle out at? What sort of numbers would you expect?
Doug Proll
We're saying for this year, operating costs are $30 to $31 a barrel. I would expect us to be very close to that in 2011.
George Toriola - UBS Securities
And then quickly on Horizon, is it fair to say that as you push Phase 1 volumes towards sort of design capacities here that you are now getting to test some of the pieces of equipment there, and that's where you're starting to see some of this reliability issues. Is that a fair way to look at it?
Doug Proll
Actually George, I don't think that's the case actually. When we're at higher volumes we actually run better. It's when we have upsets; we go down and go back up, that's when we have issues with reliability; starting equipment up and pulling it down causes reliability issues. When we run at design capacity, that's the best time we run; everything runs smooth, it just spurs along.
So, really what we're finding here, to be blunt, the hydrogen exchanger that we had here was a manufacturing error here that occurred and was not detected by their quality control or our quality control. I don't know if you could have detected it actually. And it took this long before it actually generated a leak. So we're still working through some of those issues which occurred in that 2007, 2008 period with all the hyperinflation, and every vendor was trying to get as much equipment out the door as possible.
And so we still have some of those things coming back to bite us.
George Toriola - UBS Securities
So it's not really sort of the pushing the envelope, but more and more issues from start-up so to speak.
Doug Proll
Not at all. When we run at higher rates, that's when we run best.
Peter Janson
That's what the equipment is designed to run, that it mixes sweet spot at that rate.
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