Oil titans link in oilsands
EnCana, ConocoPhillips: Canada, U.S. firms have US$26B production pact
Claudia Cattaneo and Jon Harding
Financial Post
Friday, October 06, 2006
CALGARY - Oil giants EnCana Corp. and ConocoPhillips forged a US$26-billion oilsands partnership yesterday that turns EnCana into a major integrated oilsands company and makes ConocoPhillips one of the biggest foreign companies operating in Canada.
After a year of complex discussions, the Canadian and American partners said they will produce oilsands from Alberta together and turn it into refined products in the United States at a fraction of the cost of keeping the entire business in Alberta.
As previously reported in the Financial Post, EnCana said its much anticipated oilsands strategy will involve joint development of its Christina Lake and Foster Creek thermal projects in the Athabasca basin, shipping of the bitumen to ConocoPhillips refineries in the United States that will be re-tooled and expanded to take heavier crudes from Canada.
"This deal does something a lot of the other deals can't do," EnCana chief executive Randy Eresman said in an interview.
"It effectively expands the overall market demand for bitumen and for synthetic crude. We're going to be able to expand the upgrading capacity and usage of U.S. refineries directly for Canadian crude that currently have other options.
"Because of the timing of the project, we'll be able to continue to develop our oilsands assets with a great deal of confidence, confidence that we wouldn't have had otherwise simply because it's hard to understand what the economic returns are for developing incremental projects in the province of Alberta today."
The deal involves creating two operating joint ventures, one Canadian and one American. Each company is contributing assets worth about US$7.5-billion and spending an additional US$5.5-billion each over the next 10 years , Mr. Eresman said.
The upstream plan involves increasing production from the two projects from 50,000 barrels a day to 400,000 by 2015.
The downstream plan involves significantly expanding heavy oil processing capacity at the two refineries, the Illinois-based Wood River refinery and the Texas-based Border refinery, from 60,000 to 550,000 barrels a day.
The companies' integrated strategy will cost about $35,000 per flowing barrel, an industry measure of capital intensity, compared with the current range for new integrated projects of $90,000 to $120,000, a range that has escalated in the past few years because of Alberta's hot economy.
Mr. Eresman said on a conference call the projects will be economic even if oil prices decline to US$40 a barrel.
"EnCana has a very strong position in these oilsands and their approach was they wanted to participate in full integration, and we don't have the position we wanted to have in the oilsands, but we have a strong position in refining," Jim Mulva, chairman and CEO of Houston-based ConocoPhillips, said in a conference call.
Some oilsands assets were left out of the partnership, including EnCana's Borealis project and some ConocoPhillips lands, but may be included in the future and involve construction of an upgrader in Alberta, the companies said.
That may not appease politicians in Alberta, where a campaign to replace outgoing premier Ralph Klein is underway, and oil and gas companies have become targeted as the bad guys by several of the front-runners. They would like to see bitumen produced in Alberta to be processed in the province, rather than being shipped to other jurisdictions.
The deal transforms EnCana, Canada's largest energy company, from an oil and gas explorer into an integrated oil company like Imperial Oil Ltd. and Shell Canada Ltd., involved in the key downstream aspects of the business.
EnCana will produce around 300,000 barrels a day of refined products, or half the capacity from the two ConocoPhillips refineries once they are expanded.
"That is a serious downstream operation, and it's just a division of EnCana," said Tom Ebbern, head of research at Tristone Capital Inc. "When this is up and running, EnCana will be the second-largest integrated in Canada, after Imperial Oil."
UBS analysts Andrew Potter and Michael Rimmell said the move could move up EnCana's valuation in the stock market to the higher level accorded to integrated oil companies.
With the deal, ConocoPhillips further expands its Canadian operation, which swelled last December when ConocoPhillips purchased gas producer Burlington Resources Inc., making it Canada's second-largest producer of natural gas. In terms of both oil and gas production, ConocoPhillips looks poised to become the largest foreign oil company operating in Canada.
Mr. Eresman said there has been no discussion about the partnership eventually leading to a full-fledged union between the two companies.
© National Post 2006
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