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BP, Devon join forces in oil sands Joint venture targets up to 400,000 bpd of Alberta oil sands production; BP shrugs off bitumen challenge from British legislators Gary Park For Petroleum News
BP is taking a decisive step toward producing crude from the Canadian oil sands by partnering with Devon Energy just as British Members of Parliament joined a campaign to force both BP and Royal Dutch Shell to justify their presence in the controversial northern Alberta resource.
BP, which has been a low-key, late arrival in the oil sands, said it will sell a 50 percent stake in its Kirby in-situ leases to Devon, committing the Oklahoma City-based company to spend US$650 million in the heavy oil joint venture.
The deal gives BP an experienced partner with proven steam recovery experience and rated as one of the most successful in-situ operators after Cenovus Energy, said Justin Bouchard, an oil sands analyst with Raymond James.
He told the Financial Post that Kirby is a “really nice piece of land,” which could yield 300,000-400,000 barrels per day.
Devon will pay BP $500 million when the deal closes and contribute $150 million toward capital costs on BP’s behalf over the next three years.
The two companies have also agreed to negotiate a long-term heavy crude sales agreement for Devon’s share of Kirby production.
Dave Hager, Devon’s executive vice president of exploration and production, said that based on his company’s “extensive knowledge of the area and our view of the potential of the Kirby lease, it is an asset we have been interested in for some time.”
Devon believes the recoverable resources could ultimately reach 1.5 billion barrels.
Part of $7 billion purchase The transaction was a minor part of BP’s announced $7 billion purchase of various Devon assets dominated by deepwater assets in the Gulf of Mexico and Brazilian offshore, plus Azerbaijan holdings in the Caspian Sea.
A BP spokesman said the deal, which is expected to close within the next year, is about future growth beyond 2015.
Devon now expects to exceed its previously announced divestiture sales target by 33 percent, achieving total proceeds of $10.3 billion.
The U.S. independent is already constructing the second phase of its Jackfish oil sands project and has taken steps to initiate a third phase. The initial stage is nearing capacity of 30,000 bpd.
Kirby is adjacent to the Jackfish lease and has so far totaled 250 vertical wells and the gathering of some two-dimensional seismic data.
Devon President John Richels, who gained insight into the oil sands when president of the company’s Canadian unit, said Kirby “just adds to our opportunities for incremental production in SAGD (steam-assisted gravity drainage),” while the Lloydminster heavy oil play offers additional running room.
The company will use its own natural gas production to generate steam for Jackfish and Kirby and has discussed export options for liquefied natural gas.
Value Creation interest BP is also taking a controlling interest in an oil sands property owned by privately held Value Creation to develop the 185,000 acre Terra de Grace block that is scheduled for development into a thermal recovery project.
The final price will be determined after drilling by the partners determines the size of the property’s reserves.
Value Creation Chairman Columba Yeung said BP will make “significant capital contributions” to the project.
Meanwhile, Value Creation, which has regulatory approval to build a 260,000-barrel-per-day upgrader to convert oil sands bitumen into refinery-ready synthetic crude, has been the rumored target of takeover in recent weeks, with PetroChina and India’s Reliance Industries said to be interested in buying the company for C$2 billion.
Yeung said several offers of interest from multiple parties are under review.
However, the BP entry resolves the company’s debt, allowing it to continue with its 100 percent controlled Tristar upstream project as well as the upgrader.
Construction of the upgrader was suspended in late 2007 by the original developer, BA Energy, which ran out of financing options. BA is a wholly owned division of Value Creation.
Value Creation was placed under protection from creditors in 2008, but Yeung said it is possible his company will ask an Alberta court to end that arrangement.
Because of BP’s extensive heavy oil conversion capacity in the United States, it’s possible the upgrader could be revived at some point, because it remains part of Value Creation’s plans, he said.
Fadel Gheit, an analyst with Oppenheimer & Co., said the deal is further evidence that BP is eager to gain knowledge and experience in the oil sands by closing the gap on its peers.
FirstEnergy Capital analyst Michael Dunn said it appears BP has decided that the oil sands can become an important aspect of its growth strategy by taking advantage of low natural gas prices and narrow price differentials between heavy and light oil to exploit steam-generated bitumen recovery technology.
Political heat on BP But the real heat is being turned up on BP by British legislators who have called for the MPs’ pension fund to support resolutions at the BP and Shell annual meetings demanding more information on the financial risks relating to their projects in Alberta’s Athabasca region, the current underpinning of oil sands production.
A cross-party coalition is making Alberta a target of alleged environmental and social ills related to oil sands development.
Mike Percy, dean of the University of Alberta’s School of Business and a former opposition member in the Alberta legislator, said the MPs’ action is the “opening salvo in what we’re going to see the energy industry face.” He said the oil sands are first in the line of attack, followed by coal-fired power plants.
Simon Hughes, the leading member of the coalition of MPs, said he does not want the pension fund to sell its shares of Shell and BP. The purpose he said is to pressure the two energy giants to think about their international and environmental responsibilities.
The motion before the British House of Commons claims oil produced from bitumen generates triple the volume of greenhouse gases as conventional oil and threatens the lives of aboriginal residents.
“Tar sands are a very risky investment — financially, environmentally and socially,” said Hughes, demanding to know from BP and Shell how they are managing the risks.
BP has promised to address investors’ concerns at its April 15 annual meeting. Shell’s meeting is set for May 18.
TransCanada’s Keystone In other oil sands developments:
• TransCanada has taken a clear lead in the race to deliver crude from northern Alberta to U.S. Gulf Coast refineries, gaining approval from Canada’s National Energy Board to expand its existing Keystone pipeline.
The US$12 billion system — a 36-inch crude line covering 1,980 miles — is scheduled to make its first Gulf Coast delivery within three years.
The NEB, although attaching 22 conditions to its approval, said the proposed pipeline is “in the public interest” by opening up a “large, long-term and strategic market for Western Canadian crude oil.”
TransCanada Chief Executive Officer Hal Kvisle said shippers have committed crude that amounts to 75 percent of the expansion capacity for average terms of 17 years.
The expansion will increase Keystone capacity to 1.1 million bpd from the current 590,000 bpd.
U.S. regulatory approvals are expected in the final quarter of 2010 and construction is scheduled to start in the first quarter of 2011.
The National Energy Board has forecast 3.2 percent growth in Canadian oil output to 2.81 million bpd this year, driven by an 11 percent rise in synthetic crude to 853,369 bpd.
The federal agency predicts conventional crude will continue its long-term decline, dropping by 0.4 percent to 781,000 bpd.
Production of heavy oil and non-upgraded bitumen is forecast to increase by 2.2 percent to 1.03 million bpd.
Taiga evaluation for Osum • Startup Osum Oil Sands Corp. said an evaluation by GLJ Petroleum Consultants has assigned 320 million barrels of proved plus probable reserves to its commercial application for the 35,000 bpd Taiga project.
Osum Chief Executive Officer Richard Todd said the designation reflects the “de-risking of Osum’s high-quality Taiga project,” which is scheduled to start production by 2014.
He said the company’s 2.1 billion barrels of best estimate contingent recoverable resources, together with the engineering evaluation, could support production of more than 200,000 bpd for over 30 years.
Osum has an estimated 10 billion barrels of oil-in-place in its two core project areas — the Cold Lake and Salenski carbonates, a fairway that is gaining recognition for its potential to be a major commercial bitumen development.
*Executives of Athabasca Oil Sands Corp. are taking the road show for their planned C$750 million initial public offering to Asia, where they might also encounter officials from OPTI Canada, which is pitching its prospects to Chinese oil and gas companies.
OPTI, which holds a minority stake in the Nexen-operated Long Lake project, is visiting Asia as part of a strategic alternatives review that could result in outright sale of the company.
Athabasca has ready access to potential investors in China, Singapore and other Asian nations following Petro-China’s investment of C$1.9 billion for 60 percent stakes in two of its major leases.
Analysts are betting on Athabasca’s shares hitting C$18 when they start trading.
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