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Financial Times: BP in strategic U-turn over Canada’s oil sands

By Ed Crooks in London
Published: December 6 2007 02:00 | Last updated: December 6 2007 02:00

BP has made a dramatic strategic U-turn, investing in production in Canada’s oil sands for the first time.

It has agreed a joint venture with Husky Energy, the Canadian oil company controlled by Li Ka-Shing, to pool assets worth about $5bn, and invest a further $5.5bn over the next eight years.

The move is another break by Tony Hayward, the chief executive who took over in May, from his predecessor Lord Browne.

It reflects the pressures on all oil companies as they seek to find new reserves, with many of the most attractive prospects closed or made difficult by political barriers.

BP has lagged behind its peers in investing in the oil sands of Alberta, one of the world’s largest resource deposits.

All of the leading international oil companies and many smaller ones are either producing there already or planning significant investments.

Although some companies operating in the oil sands have said their projects can be profitable at oil prices as low as $30 a barrel, cost inflation has been rampant, with wages and equipment costs soaring.

Under Lord Browne, BP tested investment decisions on the basis of long-term oil prices at $40 a barrel, which would make many oil sands investments look unattractive.

The rise in oil prices this year has made that assumption look excessively cautious.

Opec yesterday decided against increasing its production, even though oil was close to $90 a barrel, suggesting the oil producers’ group is happy with prices at that level, and the futures market is pricing a barrel of oil in five years at $85.

Tom Ellacott of Wood Mackenzie, the consultancy, said: “Even though we have had very aggressive cost inflation, at $60 or $70 a barrel, these projects make sense.”

Canada is also attractive for its relatively stable regulatory and fiscal regime, in spite of the royalty increase imposed by Alberta recently.

Royal Dutch Shell was the most enthusiastic European entrant into the oil sands during the latest wave of investment.

This year Shell bought out the minority interests in its Shell Canada unit, and is integrating it with its US refining business. StatoilHydro of Norway and Total of France have also announced multi-billion dollar investments in the region.

Having an integrated operation that unites the extraction of the oil from the sand, the upgrading to turn it into a form of crude oil, and the refining of that crude to turn it into products such as gasoline and diesel, is an important strategic advantage, because it enables the company to capture profits wherever in the value chain they can be made.

That is the model that BP and Husky have adopted in their joint venture.

BP is getting a half share in Husky’s Sunrise field, which is expected to begin production in 2012, with an investment of about $3bn, and rise to 200,000 barrels per day by the end of the decade.

Husky gets half of BP’s Toledo refinery in Ohio, which will receive $2.5bn of investment by 2015 to reposition it to take more Canadian heavy oil.

The Sunrise field has estimated resources of 3.2bn barrels of oil. However, under Securities and Exchange Commission rules BP will be able to book that oil to its declared reserves only gradually, as the field is developed.

The next important move for BP is likely to be the conclusion of its proposed joint venture agreement with Gazprom, the statecontrolled Russian gas company, although Gazprom said recently a deal was not expected before the end of the year.

Copyright The Financial Times Limited 2007

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