Irresistible force, immovable object

EnCana poised to locate oil sands upgrader outside Alberta, despite government’s drive to keep more of value-added benefits at home

Gary Park

For Petroleum News

Two behemoths are on a collision course in Alberta in what shapes up as the ultimate test case between the industry’s desire to pursue its best economic options and the government’s determination to see more of its resource wealth stay in the province.

EnCana and Alberta could find themselves on opposite sides of the fence in another few weeks, when the big independent announces whether it will build a heavy oil upgrader in the province or swap some of its oil sands properties for a stake in a Chicago-area refinery.

Mile Graham, EnCana’s president of North American operations, gave the clearest indication yet that his company is leaning towards the U.S. option.

That would be a troubling setback for the Alberta government, which wants to keep the jobs and economic benefits associated with upgrading and refining within its own borders.

Government dangling incentives

EnCana, Imperial Oil and Husky Energy have all flagged their concerns about raging inflation in Alberta’s construction sector and indicated they are considering setting up the upgrading component of their oil sands production outside Canada.

The government has said it is open to talks on possible incentives to keep the value-added portion of the oil sands in Alberta.

The response from Graham, speaking at a Peters & Co. oil and gas conference in Toronto, was essentially thanks, but no thanks.

“Our opinion is … let the free market prevail and let these things be done where it makes the most economic sense.”

That pointed strongly to an EnCana decision to trade a working interest in its oil sands properties for a stake in a Chicago-area refinery, alongside which it would also build an upgrader.

“The deal is pretty much agreed to,” said Graham. “You’re going to see (an announcement) in the next few weeks.”

BP, Marathon, ConocoPhillips all possible

Also on the short list is ConocoPhillips, an active oil sands producer, whose refinery at Wood River, Ill., has capacity to handle 360,000 barrels per day.

There does not appear to be much the Alberta government can do about such a move beyond registering its extreme displeasure when a company like EnCana — which owes part of its existence to the creation of Alberta Energy Co. in the 1970s as a provincially owned company — figures out that it’s cheaper to upgrade bitumen in the U.S.

Andrew Boland, Peters’ head of research, said several companies are looking for the best offer, whether it comes from U.S. states or Canadian provinces, in choosing their upgrader sites.

Hail to the upgrading newcomers

North American Oil Sands, despite soaring costs, is leaning toward building a production and upgrading operation carrying combined costs of C$7.5 billion in Alberta and little-known Peace River Oil is assembling land for their planned C$1.4 billion Bluesky upgrader in northwestern Alberta.

Jim Riddell, president and chief operating officer of Paramount Resources, which owns just under half of North American, said the cost of the integrated project is “irrelevant to North American … they’re going to have their own upstream production and take care of it with their own upgrader.”

He told a Peters & Co. conference that there is a “fairly large prize” in the netback from selling upgraded bitumen.

The project is expected to produce its first oil in 2008 and expand to 160,000 barrels per day by 2015.

Andrew Boland, Peter’s research director, said that although it might be easier to access capital and build in the United States, the industry should look for ways to link up with other operators to develop a “bigger solution” to the upgrading issue. Riddell said the founding shareholders (Ontario Teachers’ Pension Plan and ARC Financial) are likely to take North American public this fall.

Meanwhile, the leaders of Peace River Oil told a packed town-hall meeting in the small Alberta town of McLennan Sept. 19 that they have negotiated financial agreements in principle to meet the full capital costs of their initial phase.

Peace River Oil has accumulated more than 150 properties near the town McLennan, whose 300 residents are abuzz at the employment prospects for the upgrader, which could start at 25,000 bpd in 2010 and grow in three-year increments to 100,000 bpd.

The town manager Tammy Davis said 150 building lots have already been sold and only nine are left. Peace River Oil President and Chief Executive Officer Don Allan said that although no supply contracts are in place he is certain feedstock will be arranged through long-term deals or the purchase of reserves.

He said the project could also include an associated refinery to produce diesel fuel or naphtha and possible gasification of the heaviest bitumen residues to get around the cost and uncertainty of relying on natural gas to fuel the operation.

Allan said the private company, with eight owners, could go public within 1 to 2 years.

—Gary Park