Energy giants EnCana Corp (TSX:ECA) and Conoco-Phillips (NYSE:COP) are teaming up in a $15-billion deal to ship oilsands crude from Alberta to refineries in the United States.
The partnership will be evenly split between the two companies over the next decade and allows each to play to their strengths, said EnCana CEO Randy Erseman.
"We've had some of the best results of any player in the oilsands game getting out of the ground," Erseman told a news conference at the company's Calgary headquarters.
"Above-ground issues are completely separate. We think those should be handled by those with that expertise."
EnCana is to contribute $7.5 billion US to the refining venture, while Houston-based ConocoPhillips will invest $7.5 billion US in the oilsands business over the same period. The deal takes effect Jan. 2.
The aim is to increase production at EnCana's operations near Fort McMurray to 400,000 barrels a day of bitumen by 2015 from the current output of 50,000, through annual increases of 50,000 barrels. This will create a potential market for 400,000 barrels of synthetic crude.
Erseman says infrastructure changes will eventually be needed to transport the oil, but says that's down the road.
"There is enough pipeline capacity currently to move all the heavy oil and synthetic oil to market, but as overall supply grows in Western Canada, additional expansion projects and new pipeline projects will have to be built to accommodate the growth," he said.
"This project will not have any material impact on the overall growth plans of the province because we were always planning to do this."
The pact is good news for Calgary-based TransCanada Corp. (TSX:TRP), which has filed for regulatory approval of its $2.1-billion US plan to convert some of its Canadian natural gas mainline pipeline capacity to carry oilsands crude from northern Alberta into the U.S. Midwest.
Investment analyst Andrew Potter says TransCanada's Keystone project, in which ConocoPhillips has an option to acquire a 50-per-cent stake, is now positioned to win a meaningful portion of Alberta's growing oilsands crude oil expansion. But Keystone is not alone.
"We continue to believe a significant number of new pipelines will be required," Potter, of UBS Research, said in a research note.
Enbridge Inc. (TSX:ENB) and Kinder Morgan Inc. (NYSE:KMI) have also proposed new oil pipelines out of Alberta, where oilsands production is expected to triple over the next decade from its current one million barrels a day.
ConocoPhillips chairman and CEO Jim Mulva said the deal is good for both companies. "The value creation is shared equally between ourselves and EnCana," Mulva said in an earlier conference call with analysts.
The oilsands partnership consists of EnCana's Foster Creek and Christina Lake steam-assisted gravity drainage projects in the Athabasca region near Fort McMurray. These properties are estimated to hold more than 6.5 billion barrels of recoverable bitumen.
Investment analysts say the structure of the deal will create strong economics.
"We estimate the total cost of the integrated project to be approximately $35,000 per bbl/d, a fraction of the current industry costs that are running at over $80,000 per bbl/d for a lesser quality product," said UBS's Potter.
EnCana has spent the last four years looking for a partner to handle refining operations for its bitumen coming out of Alberta's oilsands, realizing that building its own upgrader was not a commercial solution. It got little interest until earlier this year.
"With a rise in both the valuations of refineries and the rise in oil price - bitumen in particular - we finally came to a point where it seemed to make sense for both parties to get together," said Erseman.
Adam Zive of Desjardins Securities said EnCana's bargaining position wasn't that strong against U.S-based major corporations and mid-sized integrateds with refining capability.
"In that context, they've done pretty well for themselves," said Zive. "Strategically, it makes sense versus other options in the oilsands such as building an upgrader on site. It's a much higher return prospect."
The downstream partnership contains the ConocoPhillips Wood River refinery near Chicago and a refinery in Borger, Tex. The capacity of these refineries is to increase from 450,000 barrels per day to 600,000 by 2015, with their heavy oil processing capability rising to 550,000 barrels per day from 60,000.
All capital costs and revenues in both partnerships will be shared equally, except that ConocoPhillips will take a disproportionate share of the Borger refinery's revenue for the next two years.
The companies expect total production costs of about $34 US per barrel, including transportation and refining expenses. The workers involved will remain employees of their current companies. The integration with reduces cost and price risk, and provides immediate participation in refining while accelerating development in the oilsands, Erseman said.
It also enables EnCana to stay "focused on our core competencies, that is, upstream unconventional oil and gas development, and look to those with downstream expertise to complement our industry-leading in-situ oilsands position."
In the event of cost overruns such as the expense bulges that have plagued other projects in the superheated oilsands sector, "we're partners from Day 1 on a 50-50 basis," Eresman said.
The partnership also "allows us to move forward with our project at a much wider range of future oil prices than we would have otherwise been comfortable with."
ConocoPhillips, meanwhile, gets access to a massive resource base and EnCana's expertise, said Mulva. The partnership also provides profit certainty by insulating against swings in natural gas prices and in price differentials between light and heavy oil.
He summarized the transaction as "a fully integrated oilsands solution, with world-class projects and facilities both upstream and downstream, and through both EnCana and our company these projects will have access to capital, people, expertise and technologies required to be successful."
