Sunshine Oilsands tries fresh route

Gary Park

For Petroleum News Bakken

An unnamed “international third party” has signed a tentative C$250 million agreement with Sunshine Oilsands to develop two oil sands leases in Alberta in the latest gambit to keep the startup company afloat.

Sunshine said the 50-50 joint venture would use a “thermal enhanced recovery technology” to produce an initial 5,000 barrels per day on the adjacent Muskwa and Godin leases about 90 miles west of Fort McMurray, the oil sands “capital” city.

Although the partner was not identified, an industry source said it could be China Oilfield Services, a majority-owned subsidiary of the CNOOC Group, which was involved in last year’s takeover of Nexen.

In January, Sunshine said it had reached a one-year memorandum of understanding with China Oilfield to conduct thermal fluid tests in the oil sands, adapting a technology that had proven successful in a CNOOC offshore project.

It is not clear whether the agreement will need clearance from the Canadian government which has ruled that oil sands takeovers by foreign state-owned enterprises will be approved “on an exceptional basis only.”

Sunshine is producing primary cold flow heavy oil from four well-pad sites at Muskwa where it controls almost 250,000 acres. The process uses heat, usually injected steam, to melt the viscous bitumen deposit and allow it to flow by pipeline to the surface.

But the deal is not seen as rescuing Sunshine from its cash-strapped position which has forced the company to slow progress on its 10,000 bpd West Ells thermal-recovery project while it seeks to rebuild its coffers by C$300 million.

Chief Executive Officer John Zahary said the company’s extensive asset base and the progress on West Ells should allow it to “obtain commitments for necessary funding.”

Sunshine started a strategic review in early August to consider asset sales, joint ventures, debt and equity to complete West Ells, which is expected to cost C$525 million, and bring it into production.

However, RBC Capital Markets said more details are needed to win over investors on the joint venture, saying sentiment around the company is negative.

Similarly, TD Securities analyst Michael Dembicki said the partnership potential is “directionally positive, but it is difficult to attribute value to this deal with the current information provided.”

Chris Cox, an analyst with AltaCorp Capital, said Canada’s new foreign ownership rules are likely one concern deterring investors from making a straight cash-injection into Sunshine.