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December 2010

Vol. 15, No. 49 Week of December 05, 2010

Asian oil sands invasion gathers pace

Thailand joins fold, partnering with Statoil in Alberta oil sands; Korean wealth fund expands presence in carbonate formations

Gary Park

For Petroleum News

Two state-owned enterprises are the latest from Asia to join the race to secure assets in Alberta’s oil sands, adding weight to claims that billions more dollars are poised to flood from the region into the Canadian energy sector.

The latest investments involve a US$2.28 billion deal by Thailand’s PTT Exploration and Production to acquire 40 percent of a project by Norway’s Statoil and C$100 million by sovereign wealth fund Korea Investment Corp. to bolster its presence in the emerging Grosmont carbonate play.

But PTTEP timing was far from ideal, coming one day before the Australian government blamed the company for “widespread and systematic shortcomings” causing that nation’s worst offshore oil spill in August 2009.

A fire aboard an oil rig in the Timor Sea resulted in a blowout that spewed oil and condensate for 74 days before it was capped. There were no deaths, but the costs of cleanup, ongoing environmental management, drilling a relief well and repairs are estimated at US$319 million.

PTTEP was rebuked for failing to follow safe practices, including having effective fail-safe mechanisms that would have prevented the fire and blowout.

Minority role in Kai Kos Dehseh

The disclosure took some of the shine off PTTEP’s unexpected entry into the oil sands by forking over a premium price to secure a minority presence in Statoil’s Kai Kos Dehseh project.

Three years ago Statoil paid C$1.9 billion to acquire North American Oil Sands and properties covering 257,200 acres and holding an estimated 2.5 billion-4.3 billion barrels of recoverable bitumen, adjoining 11 other commercial oil sands operations.

That purchase averaged C$1.29 per barrel for Statoil, compared with PTTEP’s C$1.33-$2.28 per barrel, depending on the resource estimate.

According to National Bank Financial analyst Peter Ogden, the medial deal value in oil sands transactions since 2008 has been about C$1.15 per barrel.

Norwegian analyst Trond Omdal estimated Statoil will reap a clear profit of US$900 million from its investments in KKD, which have included an additional US$1.5 billion to advance plans for its Leismer operation, using steam-assisted gravity drainage technology.

Steam injection began at Leismer three months ago, ahead of schedule, and initial production of 10,000 barrels per day is expected in the first quarter of 2011, increasing to 30,000 bpd pending approval from the Alberta government.

Plans include a second phase, ramping up to 60,000 bpd after it comes on stream in 2015 or 2016.

The partners are targeting eventual output of 300,000 bpd from five areas.

Upgrader shelved

The output will be sold to refineries in the United States after Statoil shelved North American’s original goal of building a facility to upgrade its bitumen into synthetic crude, starting at 20,000 bpd and expanding in phases to 250,000 bpd.

Estimating sustained oil prices of US$70-$80 per barrel would be needed to make an upgrader profitable, Statoil opted to pursue other alternatives by exporting diluted crude or negotiating commitments with U.S. refineries.

PTTEP, which is active in 11 other countries, described its move into the oil sands as a “transformational step” in its long-term growth strategy, giving it a platform in unconventional resources.

Lars Christian Bacher, president of Statoil’s Canadian operation, said his company and PTTEP are “on the same page when it comes to driving technology” to improve both the financial and environmental development of the oil sands.

He said Statoil never intended to remain the sole owner of KKD, but flatly rejected speculation by Greenpeace that Statoil is reacting to the “mounting environmental, indigenous and brand risks posed by this devastating resource” and should move quickly to unload its entire oil sands holdings.

Smaller scale investment

On a much smaller scale, but significant for other reasons, Korea Investment Corp. paid C$100 million for less than 10 percent of the shares of bitumen startup Osum Oil Sands, which owns properties estimated to contain 9 billion barrels of in-place oil, of which GLJ Petroleum Consultants believes 1.72 billion barrels are recoverable, enough to support 200,000 bpd of production over 20 years.

Although the carbonate formations have yet to achieve commercial status, several companies — including Shell Canada and Husky Energy — are evaluating methods of extracting bitumen from the carbonate limestone, confident that recovery will use less steam and pressure than conventional in-situ developments.

The Osum transaction comes only three months after KIC paid C$50 million for a minority stake in Laricina Energy, which is partnering with Osum in Laricina’s Saleski project.

Osum is also developing its 35,000 bpd Taiga project, a thermal development due to produce its first oil in early 2014.

Osum Chief Executive Officer Steve Spence said the KIC injection “adds to the war chest that helps cover the front-end costs of all our projects.”

C$10 billion in 18 months

In the last 18 months, Asian companies, dominated by Chinese enterprises, have spent about C$10 billion building their presence in the oil sands.

But Wenran Jiang, a researcher with the China Institute at the University of Alberta, said the investments are nothing compared with the billions that have flowed into countries such as Russia, Australia and Brazil.

He said a normalizing of Canada-China relations after a chilly period in 2006-09 has heated up investment.

Jiang Shan, a commercial affairs counselor at the Chinese Embassy in Canada, said Chinese companies are “looking for investment overseas. I think sound and stable political relations will facilitate China’s investment in Canada.”

David Dodge, a former Bank of Canada governor, and BMO Financial Group Vice Chairman Kevin Lynch said China and the rest of the emerging world are ready to spend having rebounded from the global economic meltdown much faster than the western world.

Murray Edwards, vice chairman of Canadian Natural Resources, cautioned that although the capital China can provide is positive “you have to be careful that there are ... appropriate forms of control.”






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