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Petroleum News: Triple play in Canada’s oil sands

Vol. 12, No. 31  Week of August 05, 2007

Royal Dutch Shell launches 400,000 bpd upgrader plans; Marathon bids to acquire Western Oil Sands and enter upstream

Gary Park & Kay Cashman

The giant Athabasca Oil Sands Project is moving from Canadian to international control, with three deals carrying a combined value of up to C$38 billion getting unveiled July 30 and 31.

Royal Dutch Shell, having brought its Canadian unit under Shell’s global umbrella, said it is embarking on one of the largest undertakings in Canadian construction history — a 400,000 barrel-per-day oil sands upgrader that could cost C$22 billion to C$27 billion over the next 15 to 20 years.

In short order, that was followed by word that Marathon Oil has a deal worth C$6.5 billion, including C$736 million of debt, to purchase Western Oil Sands, a 20 percent partner in Athabasca.

For good measure, Suncor Energy said it has applied for regulatory approval to expand its oil sands mining operation at a cost of C$4.4 billion, adding 120,000 bpd of bitumen production in the 2011-2013 period. That is part of its strategy to achieve output of 500,000-550,000 bpd in the 2010-2012 timeframe.

Although corporate sanctioning won’t take place until 2009, Shell filed a regulatory application July 30 to expand its Scotford refinery complex near Edmonton in four stages of 100,000 bpd each.

The company said the project is driven by its “desire to have the flexibility and option to upgrade bitumen from oil sands developments into higher value crude oil products” which can be used as feedstock by petroleum refineries in North America and “elsewhere.”

Greg Stringham, vice president of the Canadian Association of Petroleum Producers, told the Calgary Herald that the so-called Scotford Upgrader 2 Project will boost Alberta’s upgrading capacity to about 3.1 million bpd by 2015, meaning about 75-80 percent of all bitumen upgrading will be done in Alberta ? an estimate that will please Alberta Premier Ed Stelmach who has given priority to keeping as much value-added upgrading and processing as possible within the province.

The conclusion among analysts was that Shell, despite the staggering costs, is bullish on the oil sands.

Marathon would grow Canadian feedstock

While they probed that decision, they were kept on their toes with disclosure of the Marathon-Western deal that will give the fourth-largest integrated oil company in the United States 31,000 bpd of feedstock, growing to 130,000 bpd by 2020, for its refinery network.

Marathon is already inviting bids from Canadian producers to support a US$1 billion upgrade of its 100,000 bpd Detroit refinery to run exclusively on Canadian feedstock and has been studying expansion of two U.S. Midwest refineries so that they can handle 420,000 bpd of Canadian output.

If the transaction is completed, Marathon will have a 20 percent stake in Athabasca, which is operated by Shell as a 60 percent partner and has Chevron Canada holding the remaining 20 percent.

In addition, it will pick up 20 percent of Chevron Canada’s Ells River project, which is targeting 100,000 bpd of production by 2015.

Chevron has 60 percent of Ells River, with Shell and Western sharing the balance.

Cazalot: Athabasca ‘world-class asset’

Marathon Chief Executive Officer Clarence Cazalot described Athabasca as “truly a world-class asset with multi-billion barrel, long-life resource potential,” that Marathon, because of its Midwest downstream operations, is strategically placed to integrate into its operations.

Marathon estimates Athabasca’s base mine and five planned expansions give it a net resource of 1.5 billion barrels of bitumen, plus 500 million barrels that should be recovered from other mining expansions.

Ells River’s leases contained an estimated 600 million barrels of net resource.

It estimated that the total 2.6 billion barrels of net mineable bitumen and in-situ resource will be acquired for about US$2.38 per barrel.

The deal came eight months after Western hired TD Securities and Goldman Sachs as special advisors to seek ways to maximize value through partnerships or possible outright sale.

David Dyck, Western’s chief financial officer, told analysts July 31 that the process attracted interest from “numerous parties,” resulting in Western deciding that its best bet was to sell its oil sands operations.

He said that Shell and Chevron — Western’s Athabasca partners who were both touted as potential buyers — were “well aware of the process,” but details of the Marathon arrangement were not disclosed to them prior to the announcement.

The Marathon cash-and stock bid involves an offer of C$35.50 cash to Western shareholders or 0.5932 common shares of Marathon for each Western share to a limit of C$3.8 billion cash and 34.3 million Marathon shares. That breaks down to 65 percent cash and 35 percent shares.

The C$34.50 per share offer was a modest 4 percent above Western’s previous close on the Toronto Stock Exchange, but resulted in a sharp uptick July 31, indicating investors think a better offer could yet surface.

Reminded that Western had estimated its share value at C$42, Dyck said the due diligence process over recent months has taken all of the company’s risks into account.

The transaction also gives Western shareholders a chance to participate in the company’s highly controversial entry to Iraq through its wholly owned subsidiary Western Zagros.

They will receive one share and one-tenth of a share purchase warrant in the spinoff, which hopes to explore for and develop oil in Iraq’s Kurdistan region.

Western Zagros will receive C$82.5 million from Western, while Western insiders have agreed to contribute another C$10 million at a price of C$2.50 per share, which Western executives believe is enough to fund an exploration program.

Dyck said results from a drilling program in 2008 will provide a more accurate guide to the resource potential, which Western has previously said could run to 1 billion barrels if a field were discovered.
 
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