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299 comments on DrumBeat: October 5, 2006

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Robert Rapier on October 5, 2006 - 9:06am Permalink | Subthread | Comments top
ConocoPhillips and EnCana to Create Integrated North American Heavy Oil Business

Production from Foster Creek and Christina Lake expected to reach 400,000 BPD by 2015;
Heavy oil processing capacity at Wood River and Borger refineries to be expanded to 550,000 BPD by 2015

HOUSTON, Oct. 5, 2006 --- ConocoPhillips [NYSE:COP] and EnCana Corporation [TSX/NYSE:ECA] have entered into an agreement to create an integrated, North American heavy oil business consisting of strong upstream and downstream assets.

The venture will be comprised of two 50/50 operating partnerships, one Canadian upstream partnership and one U.S. downstream partnership, with both companies contributing equally valued assets and equity for future capital expenditures.

The upstream partnership will consist of EnCana's Foster Creek and Christina Lake projects, both located in the prolific eastern flank of the Athabasca oilsands in northeast Alberta. The assets hold independently estimated recoverable bitumen of more than 6.5 billion barrels, and the partnership's goal is to increase production from the current 50,000 barrels per day (BPD) to 400,000 BPD of bitumen by 2015. The partnership plans to transport and sell the bitumen blend (an approximate 50/50 blend of bitumen and synthetic oil) at major Alberta trading hubs. ConocoPhillips and EnCana will each own 50 percent of the partnership. EnCana will be the operator and managing partner of the upstream partnership, which will be headquartered in Calgary.

I have seen the future, and it is heavy. Very heavy.

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roel on October 5, 2006 - 9:17am Permalink | Subthread | Parent | Comments top
Alberta leadership rivals zero in on upgrading bitumen outside province

Tory leadership rivals such as Lyle Oberg are beating up the oil companies over their oilsands strategies.
An amazing thing is happening in energy-rich Alberta -- the oil industry has emerged as the whipping boy in the leadership race to replace outgoing Tory Premier Ralph Klein.

Yes, that's the sector that has enabled Alberta to live debt free, reduce taxes and boost economic growth to a rate that rivals China's.

Front-runners such as Jim Dinning and Lyle Oberg are beating up oil companies over their oilsands strategies, some of which may involve processing bitumen elsewhere because costs in the province's overheated economy have become too high.

The candidates, upset that too much of Alberta's value from its energy resources could leak outside its borders, and obviously unperturbed that the province's economy is already stretched from too much investment, want even more upgraders to be built here.

Some want to change the royalty deal affecting oilsands projects.

A sample of the hot air: "If you mine it here, you upgrade it here," is the rallying cry of Mr. Dinning.

"I will ensure that bitumen is upgraded in Alberta to the best ability of the industry," says Mr. Oberg, who wants the government to collect higher royalties on bitumen sent to the U.S. for processing. "If there are upgraders built, then they will be here."

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neon9 on October 5, 2006 - 2:04pm Permalink | Subthread | Parent | Comments top
A question, if you have the answer. Is the 'upgrading' of the heavy oil/oil sands what produces the CO2 that I hear so much about? And does it use water?
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roel on October 5, 2006 - 3:35pm Permalink | Subthread | Parent | Comments top
Far as I know, yes, the upgrading produces about 300 pounds of CO2 per barrel. It uses natural gas for the hydrogen addition. The water is mostly used in the extraction process.
There is of course much more CO2 coming from the fuel that powers the heavy equipment used throughout)

Upgrading

The oil in oil sand is called bitumen, a complex hydrocarbon made up of a long chain of molecules. In order for bitumen to be processed in refineries, this chain must be broken up and reorganized. Unlike smaller hydrocarbon molecules bitumen is carbon rich and hydrogen poor.

Upgrading means removing some carbon while adding additional hydrogen to make more valuable hydrocarbon products. This is done using four main processes: coking removes carbon and breaks large bitumen molecules into smaller parts, distillation sorts mixtures of hydrocarbon molecules into their components, catalytic conversions help transform hydrocarbons into more valuable forms and hydrotreating is used to help remove sulphur and nitrogen and add hydrogen to molecules.

The end product is synthetic crude oil, which is shipped by underground pipelines to refineries across North America to be refined further into jet fuels, gasoline and other petroleum products.

It must be noted that some of the oil companies pipe their bitumen south in diluted form for upgrading at other refineries. Others produce either a single high quality synthetic crude oil or multiple petroleum products to suit market feedstock demand.

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Robert Rapier on October 5, 2006 - 9:19am Permalink | Subthread | Parent | Comments top
One more comment on this that I saw from a UPI story:

ConocoPhillips' move marks a calculation that the price of crude oil will remain high enough to justify the joint venture's large investment.
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Nate Hagens on October 5, 2006 - 3:18pm Permalink | Subthread | Parent | Comments top
what happens if there is worldwide recession or worse and oil goes sub $40 for a couple years - do companies doing heavy oil then just shut down and wait till prices go back up again (thereby redcuing supply) or produce at a loss?

I guess it gets down to fixed vs marginal costs....?

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roel on October 5, 2006 - 3:31pm Permalink | Subthread | Parent | Comments top
Because of the tax laws for the Alberta oilsands, it easily becomes economically efficient to shut down or postpone. Companies generally pay 1% tax till the facilities costs' have been covered, and 25% thereafter. Some older companies like Suncor are already in the higher bracket, they hit the red numbers sooner.

This year, Shell and Total have announced long delays for some projetcs, and there may well be much more of that, certainly now costs are rising fast due to lack of people, equipment etc.

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tate423 on October 5, 2006 - 5:24pm Permalink | Subthread | Parent | Comments top
In all honesty that would be the best thing for the companies b/c they would get lower cost labor if they temporarily shut down. Prices would trend back up and put that back in business for awhile. OR they simply extract and store it if the marginal cost per barrel is smaller than the loss they would take on selling on the open market.  Even better, just hedge it.
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