Oilsands venture attracts global interest in Cenovus

The list of companies looking to hook up with Cenovus Energy Inc. in a new multibilliondollar oilsands joint venture include firms from India, China, the United States and Canada, its CEO says.

“There are national oil companies, there are supermajors, there are multinationals,” said Cenovus president and chief executive Brian Ferguson in an interview Thursday.

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“It covers the gambit from Houston, London, Mumbai, Beijing, Calgary.”

Earlier, in a conference call to discuss strong third-quarter results, Ferguson reported that Cenovus had quietly opened a data room in September and had pre-qualified “several” potential partners in its proposed 90,000-barrel-per-day Telephone Lake oilsands project and nearby undeveloped lands.

“There are literally billions of barrels of recoverable oil,” he said, refusing to be more specific and adding the deal may not be concluded before Dec. 31 as he had predicted this year.

International partnerships in capital-intensive oilsands projects are nothing new – the Syncrude Canada consortium was formed in 1964 to build the integrated oilsands mining project that opened in 1978 – but partners have increasingly come from Asia or Europe.

An industry observer, who asked not to be identified, said Indian energy giant Reliance Industries Ltd., based in Mumbai, has been looking at oilsands assets and is rumoured to be the buyer last month of Oilsands Quest Inc.’s Wallace Creek assets, located near the Cenovus joint venture properties, for $60 million.

Another Indian company, New Delhi-based Oil and Natural Gas Corp., was reportedly in talks to acquire oilsands reserves in Canada last spring.

Last year China Petroleum & Chemical Corp. (Sinopec) paid $4.65 billion for a nine per cent stake in Syncrude.

It also has 50 per cent ownership in two oilsands projects with French oil giant Total SA.

China National Offshore Oil Corp. is buying Long Lake partner Opti Canada for $2.1 billion in a deal that is to close in November and Athabasca Oil Sands Corp. sold 60 per cent of its Dover and MacKay River projects to PetroChina for $1.9 billion in 2010.

In December, Suncor Energy Inc. and Total announced a long-term partnership through which they are expected to spend more than $20 billion to develop two oilsands mining projects and an upgrader.

Ferguson said the timing of the Cenovus deal will depend on how discussions go over the next few months, adding it could involve cash, asset swaps or other options. An application for approval to be made before year-end will upsize the initial 35,000 bpd Telephone Lake application to 90,000, Cenovus said.

The oilsands leases are located 90 kilometres northeast of Fort McMurray and would be developed with underground steam-assisted gravity drainage methods.

On Thursday, Cenovus reported a 56 per cent increase in third quarter cash flow to $793 million or $1.05 per share from $509 million or 68 cents a year earlier, nearly matching analyst consensus of $1.08.

Net profit was $510 million or 67 cents per share, up 73 per cent from $295 million or 39 cents in the same period of 2010 mainly due to noncash gains on hedging gains.

Its 50 per cent interest in two U.S. refineries accounted for much of the increase in cash flow, as refining margins more than tripled from the third quarter of 2010.

Cenovus said $300 million US per year in net cash flow will be added in November when an expansion project at its Wood River, Ill., refinery adds 130,000 bpd of heavy oil processing capability and 50,000 bpd of overall capacity.

“The Core project supports our oil production growth plans by expanding heavy oil processing at a location already served by existing pipelines,” said executive vice-president Don Swystun, adding it’s expected that a glut of mid-Continent oil will keep feedstock costs low and profits high for some time.

Partner ConocoPhillips recently announced it will split itself in two by the middle of 2012, with one half taking the refineries and the other inheriting the Foster Creek and Christina Lake oilsands projects it shares with Cenovus. Ferguson said the split should not affect Cenovus.

UBS analyst George Toriola said Cenovus cash flow came in at less than his expected $1.20 per share because of lower downstream margins of $24.49 per barrel, driven by inventory accounting.

Kam Sandhar, an analyst for Peters & Co., said Cenovus production matched his predictions and cash flow was close.

He said the Telephone Lake project would likely cost about $50,000 per flowing barrel, similar to Husky Energy Inc.’s Sunrise project, for a total capital cost of about $4.5 billion.

Cenovus’s total oil production rose four per cent to 133,500 bpd in the third quarter as oilsands output jumped 14 per cent to 66,000 bpd thanks to startup of its Christina Lake Phase 3 thermal oilsands expansion.

Conventional output of oil and natural gas liquids fell four per cent to 67,000 bpd as the company recovered from setbacks during the very wet second quarter.

Average realized oil price, including hedging, rose 10 per cent to $68.13 per barrel.