Teck Cominco Digs Oilsands

Vancouver — Since entering into its first oilsands investment in late 2005, Teck Cominco (TCK.B-T, TCK-N) seems to be developing a taste for the petroleum side of the resource industry. The Vancouver-based miner has significantly boosted its land position in northern Alberta’s Athabasca region with joint-venture partner UTS Energy (UTS-T, UEYCF-O).

Teck Cominco’s initial 2005 foray into the Athabasca oilsands saw it acquire a 15% limited partnership interest in the Fort Hills oilsands project, located about 90 km north of Fort McMurray, Alta.

For its interest, the cash-rich mining house committed to an aggregate subscription price of $475 million in the partnership, with UTS Energy holding 30% and national oil giant Petro-Canada (PCA-T), 55%.

Under its earn-in terms, Teck Cominco will acquire a 10% interest in the Fort Hills Energy Limited Partnership by funding $250 million of its partner’s spending. The additional 5% can be grabbed from UTS by covering another $250 million in spending.

Teck Cominco’s subscription price will account for just over half of its required 34% contribution ($850 million) to project costs until spending reaches $2.5 billion. Once that threshold is reached, the partners will fund project costs proportional to interest levels.

The Fort Hills partnership looks to develop, mine and extract recoverable bitumen within its leases, based on a plan initially submitted by TrueNorth Energy, a predecessor to the partnership. The plan called for construction of a mine with capacity to produce 100,000 barrels of bitumen per day by 2011.

In mid-2004, UTS Energy acquired TrueNorth Energy from a subsidiary of Koch Industries, after it got cold feet on development plans for the project following early 2003 regulatory approvals giving the OK to proceed. UTS paid $125 million for TrueNorth, and issued 7 million warrants exercisable at 75 apiece until July 2009 to bring its ownership in Fort Hills to 100% from 22%.

UTS subsequently brought Petro-Canada on as a project partner in early 2005.

A late 2006 resource estimate of contingent synthetic crude oil within the Fort Hills project reviewed about 4.7 billion contained barrels of synthetic crude oil (SCO). An updated mine plan for the project, currently under way, looks to upgrade the estimate to a probable reserve figure. Average diluted bitumen grade associated with the ore volumes is estimated to be about 11% by weight.

The partnership has regulatory approval for production levels of up to 190,000 barrels of bitumen per day for leases 5, 8 and 52 on the project.

Construction plans, calling for the Fort Hills oilsands upgrading facility to be built about 40 km northeast of Edmonton, were submitted for regulatory approval in December 2006.

Proposed development calls for a phased construction of the upgrading facilities. Phase one, scheduled for completion by the third quarter of 2011, plans a maximum technical capacity of 170,000 barrels of bitumen per day, which would yield about 140,000 barrels of SCO.

The partners are also contemplating a more conservative approach in the initial phase, processing 100,000 barrels of bitumen daily to yield about 80,000 barrels of SCO.

Subsequent stages of upgrader expansion could boost bitumen capacity to between 350,000 and 400,000 barrels per day, and could yield between 300,000 and 350,000 barrels of SCO daily. The higher capacity could accommodate additional bitumen processing from the partnership’s future leases and potentially from third-party production.

A final decision on an optimal size for the processing facility is anticipated by mid-2007.

Separate from the Fort Hills Limited Partnership, Teck Cominco and UTS Energy have also teamed to jointly acquire a number of additional new leases in the Athabasca oilsands.

New leases

From September 2006 to January 2007, the pair added more than 1,000 sq. km of additional lease holdings, northeast and northwest of Fort Hills, at a total cost of $163.5 million.

Winter drilling on the new ground has turned up a number of potentially economic intercepts.

Feeling secure with the way its partnership has been proceeding, Teck Cominco also recently entered into a letter of intent with UTS to acquire 50% of its 28.6-sq.-km Lease 14, which adjoins the northwest corner of the Fort Hills Limited Partnership ground.

Consideration for the 50% interest is to be based on a value of $1.00 per barrel of recoverable bitumen with an assumed total Lease 14 resource of about 400 million barrels. The purchase price is subject to adjustment, based on an independent resource estimate expected by late 2007, but will be between $150 million and $250 million.

Sitting with a strong position of $4.8 billion in cash and temporary investments as of the first quarter of 2007, Teck Cominco is so far the only major mining company to have made a move into the oilsands.