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Financial Post: New kid in patch claims technology can tame costs and cut greenhouse gases

Claudia Cattaneo Calgary Bureau Chief, Financial Post
Published: Thursday, March 08, 2007

CALGARY – Value Creation Inc., a closely held oilsands company, yesterday unveiled a new integrated oilsands project in northern Alberta it says can beat the two major obstacles facing the business — high costs and high greenhouse-gas emissions.

While other developers are delaying projects or starting smaller to overcome escalating costs, the startup, backed by wealthy Asian and Canadian businessmen, said its integrated Terre de Grace project in the Athabasca region near Fort McMurray uses “smart” technology that makes its costs the lowest in the business.

“While we are all exposed to higher costs, our exposure is far lower than anybody else’s,” said Columba Yeung, chairman and chief executive of Value Creation.

The company estimates it will spend between $3.5-billion and $4-billion to build a project that will produce 80,000 barrels a day of bitumen, or about 70,000 b/d of synthetic crude.

At an estimated $45,000 per flowing barrel, an industry measure of capital intensity, it says its costs are less than half those estimated last summer by Shell Canada Ltd. for the 100,000 b/d expansion of the Athabasca oilsands project.

Value Creation believes it will also beat partners EnCana Corp. and ConocoPhillips, which are jointly building an integrated project with the production end in Canada and the upgrading and refining end in the United States. They estimated their costs at US$35,000 per flowing barrel, although Mr. Yeung said that doesn’t include diluent or transportation costs.

The new technology was created by Mr. Yeung, a Hong Kong native and former oilsands expert at Royal Dutch Shell PLC. Mr. Yeung built the architecture of Shell Canada’s Scotford refinery and upgrader near Edmonton. He also led the initial development of Royal Dutch Shell’s Nanhai refinery and petrochemical complex in Southeast China.

The Terre de Grace project, west of the Canadian Natural Resources Ltd.’s Horizon project, will use steam-assisted gravity drainage technology and upgrade bitumen on site. First oil is scheduled for 2011.

The big difference from other projects: Unlike conventional upgraders, which use refinery techniques that are modified to handle bitumen, its upgrader uses colloidal physics, a process that strips contaminants such as asphaltene at low cost and produces oil that is pumpable without diluent. A second phase achieves very fast cracking, resulting in oil that can be processed by conventional refineries.

Already, the technology is being used in the $1-billion Heartland merchant upgrader near Edmonton, being built by its majority-owned subsidiary, BA Energy Inc. It will be completed next year.

The Terre de Grace project also uses new technology at the oil production end. Its upgrader can take bitumen and water slurry directly from the wellhead, eliminating the need for surface facilities and diluent. Other projects require diluting the bitumen to allow for its transportation, which then requires separation before it’s processed.

Mr. Yeung said the Terre de Grace project will also set a new standard for low greenhouse gas emissions because it uses significantly less energy. It will reveal how much lower when it files for regulatory approval at the end of the year, he said.

Tom Ebbern, research director at Tristone Capital Inc., said it’s difficult to evaluate Value Creation because the company is private and releases little information.

However, he said it appears its oil will be only partially upgraded, resulting in a lower price than other synthetic crudes.

“The [higher] capital costs that are coming at us, are in taking that last step to making a high-quality product,” he said. “There is always a trade-off between capital and quality, and in this market, everybody is looking to trim capital. Unfortunately, there is no magic bullet and so the more capital you trim, the lower the quality you are going to get, which means somebody else in the process has to add capital to handle your product.”

Value Creation plans to eventually become publicly traded, but for now will continue to rely on private capital. The company, which counts David Tuer, former chief executive of Pan Canadian Energy Corp., among its advisors, may also link up with a partner.

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