Conoco, EnCana to link oil sands, refineries

Conoco, EnCana to link oil sands, refineries

Canada’s Encana Corp. and U.S. oil giant ConocoPhillips said on Thursday they would form a partnership to combine two of EnCana’s oil sands projects with two ConocoPhillips refineries.

The companies said together they plan to spend about $10.7 billion to raise production at Encana’s oil sands fields and expand capacity at the ConocoPhillips refineries over the next decade.

EnCana, Canada’s biggest independent oil and gas producer and one many companies hoping to exploit Canada’s vast oil sands resources, said the agreement would align two-thirds of its oil sands projects with a major refiner.

ConocoPhillips, the second-largest U.S. refiner, said the deal would give 10 percent of its U.S. downstream business access to a stable, long-term supply of oil.

The strategy behind the planned link-up was logical, one analyst said, since it would integrate the upstream oil reserves with a downstream refining arm, but the profitability was based on oil prices remaining firm.

“I don’t believe if the oil prices goes below $45 a barrel this will be as economically attractive as it looks today,” said Fadel Gheit, analyst with Oppenheimer & Co.

Canada’s oil sands represent one of the world’s most promising streams of new crude oil, but the high cost of turning the thick sludge into usable fuel makes it economical only if oil prices stay above about $40 per barrel.

The oil sands of Northern Alberta contain an estimated 174 billion barrels of crude oil, a resource second in size only to the oil fields of Saudi Arabia.

The region now produces more than 1.1 million barrels a day and, with more than $100 billion in projects planned or underway, output is expected to grow to 3 million barrels a day by 2015.

The biggest U.S. oil companies, including ConocoPhillips, are investing heavily in the region. ExxonMobil Corp. XOM.N, through its Imperial Oil Ltd. unit, operates the Cold Lake, Alberta, thermal oil sands and is planning the Kearl Lake project north of Fort McMurray.


The ConocoPhillips-EnCana ventures will be composed of two 50/50 operating partnerships, one for the upstream Canadian oil project and the other for the downstream refineries.

The Canadian side includes EnCana’s Foster Creek and Christina Lake projects, both in the eastern flank of the Athabasca oil sands in Northeast Alberta, where the companies will spend $5.4 billion to lift production to 400,000 barrels per day (bpd) by 2015 from 50,000 bpd currently.

In the United States, the partners would increase ability to refine heavy grade crude oil at ConocoPhillips’ Wood River refinery in Roxana, Illinois and Borger plant in Borger, Texas to 550,000 bpd by 2015 from 60,000 bpd currently.

The transaction, which is subject to final, definitive agreements and regulatory approval, is expected to close January 2, 2007. Both companies’ boards of directors have approved the transaction.

In very early trading, just after the open, ConocoPhillips shares rose about 1.3 percent, to $58.14, while Encana rose about 2.4 percent, to $52.28.

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