Talisman hears the call of oil sands

Chief Executive Officer Jim Buckee expects decision this year on way to monetize oil sands 25,000 acres of sands leases

Gary Park

For Petroleum News

Call it the latter-day conversion of Jim Buckee.

The chief executive officer of Talisman Energy, who is not known for caving in to pressure of any kind, is apparently on the verge of giving up a decade of spurning the oil sands.

He surprised a conference call March 1 when he said that some time this year Talisman will in “some way monetize our oil sands assets … not necessarily selling, because we don’t think selling is the way to maximize value.”

Buckee signaled that Talisman would “like to retain some interest in some vehicle going forward,” which Salman Partners analyst Kyle Preston interpreted as a message that Talisman will more likely opt for a partnership than a standalone project.

Buckee lent weight to that prediction when he told the Financial Post that discussions now under way could see Talisman take a 30-40 percent interest in a new entity to enter the oil sands.

Talisman has been last holdout

With C$100 billion worth of projects at various stages of development or planning, Buckee conceded it is time for Talisman to “realize value” from a “surprising number” of assets inherited in 1982 when Talisman was spun-off from BP.

The company owns two leases covering a combined 25,000 acres — one located north of the Long Lake joint venture by Nexen and OPTI Canada and one south of the giant Suncor Energy complex.

In addition, Talisman is already an oil sands player, on the smallest of scales.

It has a 1.25 percent working interest in the Syncrude Canada consortium and benefited from 2,854 barrels per day of production in the final quarter of 2005.

But Buckee has been dogged in building his company from core areas spread across North America and beyond to the North Sea, Malaysia, Indonesia, Algeria and Trinidad and Tobago.

He has been vindicated by results over recent years, including seven straight years of record cash flow and a doubling of share values over the past year, making Talisman one of the prime takeover targets in Canada.

Buckee has spurned suggestions he should broaden Talisman’s portfolio by embarking on unconventional plays such as the oil sands that have enticed a growing list of Canadian and international companies or the “resource” gas plays that underpin the future of rival EnCana.

Buckee has been skeptical of thermal processes

Declaring that Talisman’s expertise lies in conventional oil and gas plays, Buckee said the oil sands “tie up large amounts of up-front capital, with the risk of cost overruns, production outages, rising input costs and performance issues.

“Our diversity allows us flexibility and limits individual project risk (although Talisman does participate in tight gas and coalbed methane plays),” he said.

“At the right time, when technology is better proven, we might invest more in these areas,” Buckee said in what was billed as a “discussion” published in the company’s 2004 annual report.

He did not say whether the risks have diminished and the technology now meets his standards, but the long-term outlook for oil prices has sweetened the economics of oil sands development and the opportunities are evaporating as operators corner the few remaining leases.

Oil sands lease sold to Deer Creek

Deer Creek sold its 84 percent share of Joslyn last year to France’s Total for C$1.67 billion.

Now former Deer Creek Chief Executive Officer Glen Schmidt has returned to the scene of his greatest triumph.

Through his privately held Laricina Energy he has bought back into Joslyn, securing a 1 percent stake for an undisclosed amount, but estimated by outsiders to be worth about C$20 million.

It’s a first step by Schmidt on the road to building Laricina into a 100,000 bpd producer of bitumen from a range of projects.

Laricina issued shares to buy the 1 percent from Enerplus Resources Fund, which now owns 15 percent of Joslyn.

Having raised C$77.5 million in December, Laricina has since been acquiring oil sands leases in Alberta government land sales.

Based on a solid track record in the sector, Schmidt said his company is looking to grow in less-popular areas, telling the Globe and Mail that “what would appear to be obvious will be more expensive and what is less obvious provides a significant opportunity. We intend to be active where we can add value.”

He intends to use thermal recovery to remove bitumen, estimating the average operating cost at C$10 per barrel — a figure he hopes to shrink by 25 percent.

For Joslyn, Total is planning a 200,000 bpd mining operation and 40,000 bpd from steam injection methods, giving Laricina 240,000 bpd at peak output.

Total is also planning to build an upgrader to process the bitumen into refinery-ready crude.

Chevron goes big time in oil sands

Covering 180,000 acres the leases have been assembled over recent months at a cost of less than C$70 million, rated a bargain basement price alongside some of the successful bids at Alberta government land sales over the past two years.

Maverick Land Consultants, acting for Chevron Canada, paid an average C$838 per hectare for three of the leases covering 16,128 hectares (39,852 acres) last August, a steal alongside the average C$3,684 paid at a February auction.

“One of the big advantages is the price of entry,” said James Bates, vice president of operations and asset development at the Canadian unit of Chevron.

But the price may also reflect Chevron Canada’s decision to push development farther west than any existing project.

If appraisal drilling, expected to start in next winter, confirms the quality and scope of the estimated resources, the company will have found a “very cheap way” of capturing the bitumen assets, Tristone Capital analyst Tom Ebbern told the Calgary Herald.

However, Chevron Canada said it had no part in a February land sale when a company registered as 1122131 Alberta forked over C$464 million for 10 leases west of existing oil sands operations and has yet to disclose its principals or its intentions.

Bates said the company has been looking for a chance to grow in the oil sands after taking a 20 percent stake in the Shell Canada-operated Athabasca project.

The company believed it could find good quality acreage at a government sale and is happy to have landed the acreage it did.

Cost may have been 1 cent per barrel

If the Ellis River project goes ahead, possibly on the scale of 100,000 barrels per day, it could involve Athabasca’s three existing partners — Shell Canada 60 percent, Chevron Canada and Western Oil Sands (20 percent each). They hold options on any new development, with Chevron Canada as 60 percent operator and the other two spitting the balance, but Shell Canada said it has yet to decide whether to join a new operation.

The new leases are 24 miles southwest of the Athabasca site, but are too deep to be exploited by the mining methods used at Athabasca.

Bates said the initial view is that Ellis River would be a candidate for steam-assisted gravity drainage technology, which injects steam to melt the bitumen, forcing it to the surface.

While conceding the challenges that lie ahead, Bates noted that parent company Chevron has acquired considerable expertise operating heavy-oil projects on a global scale, notably Indonesia’s 212,000 barrel per day Duri field, the world’s largest steam-flood project.

Chevron Canada President Alex Archila said the purchase of leases puts the company in an excellent position to “pursue in-situ oil sands development” by building on “our existing thermal and oil sands knowledge and capabilities.”

George Kirkland, Chevron’s executive vice president, upstream oil and gas, said the Alberta opportunity “expands our efforts to develop high-quality, large-scale resources to enhance our production growth profile.”

—Gary Park