Alexa

Conoco, EnCana to boost Canada oil output, refining with $10.7 billion investment

Conoco, EnCana to boost Canada oil output, refining with $10.7 billion investment

U.S. energy major ConocoPhillips and EnCana Corp., Canada's largest hydrocarbons producer, said Thursday they will spend $10.7 billion (euro8.4 billion) over the next decade to boost Canada's oil production and deepen its access to the U.S. market.
The companies, via a pair of joint ventures, aim to increase the output of crude oil from two of EnCana's projects in Alberta's oil sands, a region where the oil is heavy and difficult to refine, and expand the capacity of two of ConocoPhillips' U.S. refineries to process the crude.
Canada is already the largest exporter of crude oil to the United States. The deal deepens ties between the two countries at a time when multinational energy companies are facing increasingly hostile governments in oil-rich countries such as Venezuela and Russia, where ConocoPhillips has a joint venture with producer OAO Lukoil Holdings.
The joint ventures also address the issue of refining capacity in the United States, which is unable to produce all the fuel it needs. Analysts also have pointed to the need to boost global capacity to process the heavy grades of crude that account for much of the world's marginal supply.
For ConocoPhillips, the second-largest refiner in the United States, the deal locks in reliable supplies and gives it more exposure to Canada's oil sands, an increasingly popular energy investment destination that's expected to see crude oil output triple to 3 million barrels a day by 2015. For EnCana, the agreement secures a home for burgeoning oil sands oil production as well as distributes the risk of new developments, many of which are not considered profitable at oil prices below $40 a barrel.
Under the agreement, ConocoPhillips and EnCana will operate two partnerships on a 50-50 basis. The Calgary-based production partnership involves EnCana's Foster Creek and Christina Lake projects and will be run by the Canadian company. The companies aim to increase output of bitumen _ a tar-like substance that has to be separated from the sand _ to 400,000 barrels a day from 50,000 barrels a day by 2015. This is estimated to cost $5.4 billion (euro4.2 billion).
The other venture will involve ConocoPhillips' Wood River refinery in Roxana, Illinois, and its Borger, Texas, plant. The two companies plan on spending $5.3 billion (euro4.2 billion) to expand heavy oil processing capacity at these facilities to 550,000 barrels a day from about 60,000 barrels a day by 2015. As part of the investment, total throughput at these plants will also increase.
The agreement to create the joint ventures is the latest strategic move by ConocoPhillips CEO Mulva. ConocoPhillips closed earlier this year on its $36.5 billion (euro28.7 billion) acquisition of North American natural gas powerhouse Burlington Resources, just as gas prices began an extended decline.
In a conference call with analysts, Mulva said he expects ConocoPhillips' return on capital from the ventures to vary between 10 percent and 14 percent.
ConocoPhillips may defer some previously planned investment into upstream, an industry term that refers to exploration and production, to accommodate the EnCana deal, Mulva said, reaffirming ConocoPhillip's target of 3 percent annualized growth in crude oil and natural gas output between 2006 and 2010.
By the end of 2007, ConocoPhillips will have finished "several billion dollars" worth of asset dispositions as it seeks to rebalance its portfolio, he added.
The ventures will require between $100 million (euro79 million) and $200 million (euro157 million) in additional spending by EnCana before 2008 but will be self-funding afterward, EnCana Chief Financial Officer Brian Ferguson said during a separate conference call.
"It's not material," Ferguson said. "It's in the $100 to $200 million range different than what we otherwise would have invested if we were still in go-it-alone mode."
EnCana had originally planned to partner with U.S.-based independent refiner Premcor, but Valero Energy Corp. pulled out after it acquired Premcor in April 2005. Since then, EnCana has conducted negotiations with a range of candidates, including Marathon Oil Corp., Koch Industries Inc. and BP PLC .
Underscoring the Midwest's move toward Canada as a crude source, BP last month said it would invest $3 billion (euro2.36 billion) between 2007 and 2011 to upgrade its refinery in Whiting, Indiana, to allow it to raise the amount of Canadian crude it processes.
ConocoPhillips and EnCana's agreement to expand both crude oil supply and refining capacity comes as oil futures have fallen below $60 a barrel from their July high of $78.40. Although the companies agreed to the joint venture assuming an oil price above $50 a barrel, the project should remain profitable even at $40, Ferguson said.
Canadian crude usually trades at a large discount to the light, sweet benchmark crude oil whose futures trade on the New York Mercantile Exchange due to its poorer quality and limited access to the U.S. market. While this poses a challenge for the upstream part of the business, the downstream _ or refining and marketing side _ benefits from buying cheaper feedstock and then selling refined products at prevailing market prices.
___
Anna Raff is a correspondent of Dow Jones Newswires


Updated : 2020-11-30 19:53 GMT+08:00