BP Alters Strategy With Oil Sands Deal

The company's asset swap with Husky Energy could irritate the environmentalists.
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BP

(BP) - Get Report

announced Wednesday that it's gaining a foothold in the Canadian oil sands via an asset swap with Calgary-based

Husky Energy

.

Under the agreement, BP is trading half of its stake in its Toledo, Ohio, oil refinery for half of Husky's position in the Sunrise oil sands field in Alberta, Canada. Two equally-owned joint ventures will be formed to own and operate the businesses.

The Sunrise field is expected to begin producing bitumen, the heaviest and thickest type of crude oil, in 2012. By 2020, it should have output of 200,000 barrels of oil a day. Estimates also indicate that the field will continue producing oil for 40 years.

Operations at the Sunrise field will continue to be managed by Husky Energy.

The refinery in which BP is giving up a share currently produces 155,000 barrels a day, 60,000 of which is heavy crude. Production capacity at the Toledo refinery will be increased to 170,000 barrels a day by 2015, and it will continue to be operated by BP.

BP and Husky Energy will together invest $5.5 billion to get the joint ventures in working order.

"The result will be the development of a major new Canadian oil field and the modernization and expansion of the Toledo refinery to allow far greater use of Canadian heavy oil and to increase clean fuels production by as much as 600,000 gallons a day," said Bob Malone, chairman of BP America, in a press statement.

According to Lew Watts, CEO of energy consultancy PFC Energy, the fact that BP is entering the Canadian tar sands at a time when the government there is threatening to increase taxes and royalties indicates just how few opportunities there are globally for integrated oil companies to access new material reserves.

"It's definitely a sign of the times for integrated oil companies seeking new sources of supply," Watts said.

According to Matti Teittinen, energy analyst at John S. Herold, BP said earlier this year that it wasn't planning on getting into the tar sands business. "BP thought it could meet its margins on the downstream side," he said.

However, in a year when a drilling project in Russia was expropriated and negotiations on a natural gas project in Libya stalled, BP likely decided that Canada was a safer place to do business, Teittinen said.

The transaction also represents a change in environmental strategy for BP, Watts says. BP's assets going into this transaction were very light on carbon emissions compared with its competitors. A greater share of its portfolio is made of natural gas assets that produce relatively little carbon dioxide, with fewer positions in oil, tar sands and gas-to-liquid technologies.

That will change somewhat with its move into tar sands. The energy outlay required to extract heavy, dirty oil from the sand and clay in the tar sands is enormous.

And for a company that has touted itself as an environmentally friendly energy giant, the public reaction to its latest move could be divided.