BP returns to oil sands

Vancouver – British Petroleum (BP-N, BP-L) has made a big swing back into the oil sands with two separate deals to develop properties in the Athabasca region.

Most recently, BP struck a deal with privately-held Value Creation to take a majority stake in the 74,000-ha. Terre de Grace oil sands project northwest of Fort McMurray. The project is expected to use steam-assisted gravity drainage to recover the heavy oil.

Neither party would put an exact figure on the deal. Value Creation CEO Dr. Columba Yeung said the price will depend on further drilling and a better-defined resource, but put the range between $1billion and $2 billion.

Only days earlier, BP announced a deal with US-based Devon Energy (DVN-N) that will see Devon sell its off-shore oil properties to BP for US$7 billion, while BP would sell a 50% stake in its undeveloped Kirby oil sands project to Devon for US$500 million.

Devon’s off-shore properties include deepwater assets in the Gulf of Mexico, off Brazil’s coast, and off Azerbaijan’s coast in the Caspian Sea.

Devon and BP would be partners in developing the Kirby project, which has an estimated 1 to 1.5 billion barrels of recoverable oil. Devon will serve as operator of the Kirby project and has also committed to spending US$150 million to advance the project.

The Kirby project, like Terre de Grace, is expected to operate under steam-assisted gravity drainage. The project is located roughly 15 kilometers southeast of Conklin, AB.

The deal includes a long-term off-take agreement for heavy crude from the Kirby project and some of the production from Devon’s other oil sands project. BP is currently retooling its Whiting, Indiana, refinery to significantly increase bitumen capacity in anticipation of shipments from Kirby and elsewhere.

“Devon is an experienced operator in the Canadian oil sands with a proven track record of in situ development and production,” said Andy Inglis, BP’s chief executive of exploration and production, in a statement. “We expect this transaction will accelerate the development of the Kirby assets and, through the associated crude off-take agreement, provide a secure source of Canadian heavy oil for our advantaged Whiting refinery.”

The Kirby property is adjacent to Devon’s 35,000-barrel-a-day Jackfish project, with similar geology and production needs.

The property is also next to Canadian Natural Resources’ (CNQ-T) Horizon project, which it bought from BP for $1.5 billion in 1999.

BP had all but abandoned the oil sands under the leadership of former CEO Lord Browne of Madingley, who had been a vocal critic of the heavy oil. Browne led BP through a rebranding from a petroleum company to an energy company under the slogan “beyond petroleum”, investing heavily in renewable energy and emphasizing its green credentials.

Browne, however, stepped down in mid-2007 and was replaced by Tony Hayward. The new chief executive wasted little time asserting his support for oil sands investment, signing a deal with Husky Energy (HSE-T) to develop the Sunrise in situ oil sand project in late 2007. BP is currently refitting its refinery in Toledo, Ohio, to prepare it for the heavy bitumen that is eventually planned to arrive from Sunrise.

The Husky deal has led activist shareholders to protest BP’s involvement in the oil sands. Even before the latest two deals were announced, a group of pension funds had organized under the name FairPension to voice opposition to the Husky plan. The group plans to bring forth a motion at the company’s shareholder meeting on April 15th that challenges BP’s involvement in the oil sands.

Browne, however, has struck a more pragmatic approach than his predecessor, noting that renewable energy will not be able to fulfill energy needs in the short term. In a speech delivered in February, Browne said BP projects energy demands will increase 45% by 2030 and that a diversity of energy sources will be required to meet those needs.

“In BP our own portfolio reflects this diversity,” said Browne in the speech. “For example to date, in our low carbon energy business we have invested over $4 billion and are continuing to invest more than $1 billion a year. In another area we are planning to invest in Canadian heavy oil – a relatively carbon intensive activity, but one that has a major role in providing access to secure energy for North America.”