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Husky, BP move to the beat Form two joint ventures to develop, process heavy oil and bitumen from Alberta; deal signals BP’s entry into oil sands upstream, with ‘billions of dollars’ at stake Gary Park For Petroleum News
Husky Energy has moved from a slow waltz to a quick step in laying out its long-term plan for processing heavy oil and bitumen from Alberta and dragged BP on to the dance floor in the process.
The companies announced Dec. 5 what had long been speculated. They will form two independent 50-50 joint ventures — one to develop upstream resources and one for the downstream — mirroring last year’s blockbuster deal by EnCana and ConocoPhillips.
BP will take a half-share in the Sunrise project that is scheduled to come on stream at 60,000 barrels per day in 2012 and expand in two more phases to 200,000 bpd over the 2015-2020 period.
BP will contribute its Toledo, Ohio, refinery which has crude distillation capacity of 155,000 bpd and current throughput of 135,000 bpd, including 60,000 bpd of heavy sour crude. BP plans to increase bitumen processing capacity at the refinery to 120,000 bpd, boosting total throughput to 170,000 bpd by 2015.
BP had been last holdout The deal with BP is the final concession by the global super major that the oil sands have an economic role to play in North America’s supply equation, following an earlier plan to modify its Whiting, Ind., refinery to process heavy crude from Alberta.
Until this year, BP had been the last holdout from the oil sands of all the major companies operating in North America.
It signaled a change in outlook in its latest annual Statistical Review of World Energy by crediting the oil sands with holding 163.5 billion barrels of undeveloped reserves, representing oil that it believes could be produced using current technologies in today’s economy, and separately listed 10.3 billion barrels of reserves that are under active development.
BP said at the time that its standard is not how much oil is buried in the sands, but whether it can be economically produced.
Bob Malone, the chairman and president of BP America, said the joint ventures “will be investing billions of dollars to expand North American energy supply and enhance North American energy security.”
He said the result will be the development of a major new Canadian oil field along with the modernization and expansion of the Toledo refinery to permit “far greater use of Canadian heavy oil and to increase clean fuels production by as much as 600,000 gallons a day.”
The refinery currently produces 3.8 million gallons per day of gasoline, 1.1 million gallons of diesel and 756,000 gallons of jet fuels — about 0.5 percent of total US refining capacity.
BP said a joint investment of about US$2.5 billion is expected up to 2015 to sustain and reposition the refinery to process increased amounts of heavy oil and bitumen, with Husky having first call on up to 50 percent of the refinery capacity for Sunrise bitumen.
Upstream costs about US$3 billion At the upstream end, Husky estimates the Sunrise project will be about US$3 billion up to 2012.
Husky will also move ahead with repositioning its Lima, Ohio, refinery, acquired in May from Valero Energy for US$1.9 billion. The 160,000 bpd facility is being reconfigured to handle Husky’s growing heavy oil production, with some analysts putting that cost at US$2.9 billion.
Backed by discovered resources estimated at 41 billion barrels, Husky has a full slate of prospects and Husky President and CEO John Lau admitted that he is expecting “more deals” to emerge from the joint ventures, but was tight lipped beyond that point.
It currently produces 106,000 bpd from its heavy oil and bitumen operations, including the Tucker oil sands project which is expected to peak at 30,000 bpd by late 2008.
In addition, it is nearing completion of a pilot project for its Caribou lease of 2.5 billion barrels and has identified 12 locations for winter drilling at its 24.1 billion barrel Saleski lease.
But the BP deal will not sit well with the Alberta government, which is planning incentives to keep more of the value-added upgrading and refining end of oil sands production in Alberta.
Husky has long hinted that inflationary construction costs and access to the major consuming markets might drive it to the United States.
Lau said the upgrading credits proposed in Alberta’s new royalty framework were not sufficient to persuade Husky to build capacity in the province. Because the government has yet to unveil a specific plan, he said it was difficult to comment.
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