BP finally gets back in oilsands

Claudia Cattaneo, Financial Post

Published: Thursday, December 06, 2007

Tony Hayward, the new chief executive of BP PLC, put his first stamp on the oil major's North American business yesterday by doing what his predecessor had stubbornly refused to do: own a piece of the oilsands. The U.K. firm's distaste for the business went so far under John Browne that it sold its leases to Canadian Natural Resources Ltd. in 1999 for so little the transaction was a mere footnote in a larger deal. It also excluded oilsands reserves from its influential annual statistical review of world energy and repeatedly dismissed the deposits as uneconomic, while running after opportunities in Russia and Angola. That's all changed with its deal with Husky Energy Inc. -- a joint venture in which BP will own half of Husky's Sunrise thermal project, while Husky will own half of BP's Toledo refinery. Under Mr. Hayward, "there is an element of a new era, a different way of looking at the portfolio," said one industry source. There are other motivations: high oil prices, finding the right partner and oil-industry nationalization underway globally that is shrinking opportunities for Western oil firms. "BP's move into oilsands is an opportunity to build a strategic, material position and the huge potential of Sunrise is the ideal entry point for BP into Canadian oilsands," Mr. Hayward, who became CEO in May after Lord Browne's retirement was accelerated by a sex scandal, said in a statement. There is wider significance to BP's move. The world's top oil multinationals are now fully represented in the basin, transforming Alberta's oil community into what is likely the globe's most diverse. The conversion of the last important skeptic adds legitimacy to the resource, which struggled for years to be accepted as real oil. BP has in fact been trying for at least a couple of years to re-enter the business, as part of a strategy to secure supplies to feed its refineries in the United States. It tried to do a deal with EnCana Corp., but the Canadian company last year picked a joint venture with ConocoPhillips Ltd., which apparently had the inside track. For its part, Husky, controlled by Hong Kong magnate Li Ka-shing, worked hard to tie the knot with Marathon Oil Corp., but that fell through when Marathon purchased Western Oil Sands Inc. this fall. BP and Husky then accelerated their discussions, no doubt with encouragement from Robert Peabody, a former BP executive who is now Husky's COO. BP was an early believer in heavy oil. In the 1980s in Venezuela, it developed with the state oil company an emulsion fuel called Orimulsion to facilitate the transportation of heavy oil that it also wanted to use to transport heavy oil out of Alberta. But it lost that lead when it sold its Canadian oil operations, just as competitors Royal Dutch Shell PLC and Exxon Mobil Corp. were ramping up their oilsands business. BP's natural-gas business, one of the top three in Canada in 1999, also went into decline. It produces 400 million cubic feet a day, or 280 millon cubic feet net of royalties. Still, BP's entry into the oilsands is not too late. It comes after the oilsands' frenzy of a couple of years ago and through an integrated model that has been widely applauded. Its deal closely mirrors the EnCana/ConocoPhillips venture, which appears to be working well. "I still get asked the odd time on the street whether we are staying in Canada," said Randy McLeod, president and CEO of BP Canada. "This is more reassurance that BP is committed to development in Canada." As for the status of the oilsands in its statistical review, "Look at it next June and see if there is any big change," said BP spokesman Robert Wine. ccattaneo@nationalpost.com