2011 in review: Big year for foreign deals in oilsands

Just when it looked like Imperial Oil Ltd.'s sanctioning last week of an $8.9-billion expansion of its Kearl mine might be the final big oilsands deal of 2011, Osum Oil Sands Corp. announced late Friday it had raised $500 million from a private placement with investors including the Singapore government.

Under the deal, the privately owned thermal oilsands player will issue 21.2 million shares at $12.50 per share for $265 million, plus 18.8 million callable share warrants at $12.50 each for $235 million. It's expected to close by Jan 18.

The deal, supported by existing shareholders and an investor group led by Kern Partners of Calgary that includes the Government of Singapore Investment Corp. and two large unnamed Canadian institutional investors, takes Osum's privately raised total investment to more than $1 billion.

The financing illustrates several trends in the oilsands - interest from foreign national corporations, the growth of in situ or drillable oilsands operations over mining, and the opening of the Grosmont carbonate formation in an industry focused until now on the McMurray clastics.

Osum is a partner in the Laricina Energy Ltd.operated Saleski Grosmont

pilot program, which began producing bitumen through steam-assisted gravity drainage in March.

Unlike the sandstone clastics, the bitumen in the carbonates is held in tight rock such as dolomite and methods to extract it are considered unproven, therefore the estimated 400 billion barrels it holds in place are not counted in Alberta's recoverable reserves.

The two private companies have both also attracted millions of dollars from the South Korean national oil company, Korea Investment Corp.

As 2012 dawns, the chance that oilsands output will more than double to 3.7 million barrels a day by 2025, as predicted in June by the Canadian Association of Petroleum Producers, turns on many issues but investment intentions seem as strong as ever.

CAPP president Dave Collyer said in a year-end interview he believes the forecast for oilsands growth could still play out because economic basics haven't changed.

"We remain very optimistic about the upstream potential and certainly the growth plans, the investment plans, the ability to attract capital, none of that has changed materially," he said.

FirstEnergy Capital Corp. oilsands analyst Michael Dunn agreed that spending is on the upswing.

"We've sort of seen a lull, at least from the major oilsands producers, since a peak in 2008 in terms of spending," he said.

"It's been low relative to '08. But beginning next year, we're anticipating the spending of the major players will approach close to what we saw in '08 and then maybe exceed that in 2013 to 2015."

FirstEnergy expects oilsands production will grow by 1.2 million bpd in the five years from 2010 to 2015.

Dunn said oilsands producers are churning enough cash flow to pay for that growth, noting that despite New York oil prices at around $100 US per barrel, share prices discourage issuing new equity because they are undervalued by as much as 20 per cent due to investor uncertainty.

But challenges loom on the political side.

From protesters ringing the White House to appeals for boycotts by cosmetics companies, the anti-oilsands movement became ever more strident through 2011.

An Alberta-based environmental group, the Pembina Institute, said recently that all of Alberta's climate-change strategies put together will cut emissions by just 14 megatons by 2020, less than one-third of the government's goal of 50 megatons.

It recommended increasing the carbon price on big emitters and called for a slower rate of approving oilsands projects with more stringent emission standards.

U.S. State Department regulatory delays to the Keystone XL pipeline designed to take oilsands crude to Texas refineries and a lengthening regulatory process for the Northern Gateway pipeline to the B.C. West Coast represent a risk that could hurt oilsands growth, Collyer conceded.

"The challenge obviously that has come to the fore with the Keystone XL decision is the timing and ability to develop infrastructure to move that product to market," he said.

Collyer said CAPP is optimistic both pipelines will be approved eventually because they are needed, but predicting when is difficult.

"Those things have to happen in order for oilsands to realize the kind of growth that we believe is possible," he said.

CAPP expects to see about $20 billion in capital spending on oilsands in 2012 from about $55 billion spent on the overall Canadian oil and gas sector.

In 2011, about $19 billion is estimated to have been spent on oilsands.

Collyer said he also expects to see increasing use of technology to improve performance and more collaboration between industry players on initiatives such as oilsands tailings pond reduction.

Sveinung Svarte, president and chief executive of Athabasca Oil Sands Corp., agreed that economic factors favour oilsands but market access and cost escalation are potential impediments.

"We see many international and national oil companies want to increase their oilsands portfolios and most of them view Western Canada as a safe haven for their investments," he said on a recent conference call.

Athabasca Oil Sands has set its sights on inking more joint ventures after selling 60 per cent stakes in its MacKay River and Dover thermal projects for $1.9 billion to PetroChina in 2009.

On the same call, Svarte warned that Athabasca has seen a 15 per cent rise in the price of drilling shallow oil-sands wells and is working with contractors to keep those costs in check. He said investors are jittery about macro-economic and geopolitical issues.

"It doesn't mean there are no challenges to develop these resources in Western Canada," he cautioned. "Europe and the United States could dip into recession, the stock markets globally have become very risk adverse and energy stocks continue to be volatile.

"Investors worry about escalating cost pressures to develop these resources, they worry about the world-wide competition for talent and technical expertise and they worry especially about Canada's access to markets in the U.S. and abroad.

"Canada has ambitions to become an energy superpower but to become that, it needs access to oceans and large supertankers and the only solution for that is to develop export pipelines such as the Gateway project to the West Coast."

In a recent report, Bob Dun-bar, president of Calgary oil-sands consultancy Strategy West, came up with nine obstacles that could interfere with oilsands growth.

They include the cost of new environmental regulations but also note market price levels for bitumen and synthetic crude, input energy costs for natural gas to make steam, the fear of labour cost overruns, and the availability of skilled labour and capital.

He also points out that protester-related delays in pipeline approvals could create market-access issues for the industry.

Dunbar also identified in-adequate northern Alberta road and rail infrastructure and questioned whether there will be enough diluent - light petrochemicals such as condensates that are blended with bitumen to allow it to flow in a pipeline.

Technology limitations present another challenge, observers agree, and were blamed for a delay in a planned expansion worth billions at Canada's second-oldest oilsands mining project, Syncrude Canada.

Operator Imperial Oil said last fall the plan to grow out-put at the mine from 350,000 to 600,000 bpd will not likely be undertaken in this decade due to ongoing problems in improving reliability at the existing facility.

For Osum, however, all signals are green.

President and CEO Steve Spence said in a news release the new investors prove its goal of building a company that produces as much as 350,000 bpd is catching on.

"Our ability to attract this significant level of investment from such a sophisticated group of investors in these difficult financial markets is a testament to the strength of our assets, strategy and team," he said.

The proceeds will be used to fund the joint venture pilot, fully fund Osum's share of a 10,700-bpd commercial demonstration project there and advance its Cold Lake-area Taiga oilsands project.

dhealing@calgaryherald.com

2011: The year in oilsands

? Jan. 6: An upgrader explosion and fire at the Canadian Natural Resources Ltd.'s Horizon oilsands mine injures five staff and shuts down the 110,000-barrel-per-day facility for seven months.

? Feb. 16: Alberta agrees to a 30-year bitumen supply deal for the $5-bil-lion, 50,000-bpd oilsands upgrader being built near Edmonton by North West Upgrading Inc., partnering with CNRL.

? April 5: Alberta announces a draft Athabasca land use plan that would set aside nearly two million hectares of conservation lands near the oilsands.

? Apr 26: Cenovus Energy Inc. wins provincial approval for an estimated $2.7-billion expansion of its Christina Lake thermal operations. Three expansion phases of 40,000 bpd each are to bring gross production capacity to 218,000 bpd.

? June 8: The Energy Resources Conservation Board predicts the province will be pumping 3.5 million barrels of bitumen per day from the oilsands by 2020, more than 90 per cent of its total expected oil output of 3.8 million bpd.

? July 21: Federal Environment Minister Peter Kent releases a sweeping oilsands monitoring plan expected to cost $50 mil-lion per year but no implementation schedule.

? June 31: Devon Energy Corp. proposes a 140,000-bpd development plan for its Pike oilsands lands over the next dozen years.

? Oct. 31: Private oilsands company Laricina Energy raises $520 million from investors through a private placement.

? Nov 2: China's top off-shore oil firm, CNOOC Ltd., closes its $2.1-billion acquisition of Opti Canada Ltd.

? Nov 5: Seinfeld's "Elaine" - Julia Louis-Dreyfus - appears in a new video calling the proponents of TransCanada's Keystone XL pipeline "very greedy guys."

? Nov. 10: U.S. State Department says no decision on the $7-bil-lion Keystone XL oilsands pipeline until after the 2012 presidential election.

? Nov. 23: A plan to expand production by 200,000 barrels a day by 2020 at oilsands miner Syncrude Canada won't happen in this decade, says opera-tor and 25 per cent owner Imperial Oil.

? Nov 29: Oilsands Quest Inc. files for court protection from creditors after an unidentified buyer backs out of an agreement to acquire assets.

? Dec 1: The longest-serving chief executive in the oilsands, Rick George, 61, announces he will retire from Suncor Energy Inc. after nearly 20 years.

? Dec 5: Alberta regulator approves the $1.3-billion, 35,000-bpd third phase of Devon's Jackfish oilsands project.

? Dec 6: The joint review panel into the Northern Gateway oil pipeline to the B.C. coast will says hearings will take a year longer than expected due to the number of interveners.

? Dec 8: Federal government approves construction of the $9-billion Joslyn North Mine by Total E&P Canada with partners Suncor Energy, Occidental Petroleum and Inpex Canada.

? Dec. 21: Imperial Oil says Kearl oilsands mine development costs have climbed more than 20 per cent per barrel; announces approval of $8.9-billion doubling of first phase.

Source: Calgary Herald archive