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BLOOMBERG: Shell, Sinopec Are Paying Record Prices in Rush to Buy Canadian Oil Sands

Shell, Sinopec Rush for Canadian Oil Sands, Send Prices Soaring
Feb. 20 (Bloomberg) — Canada's hottest piece of real estate isn't much to look at, a mix of swamp and scattered spruce and pine trees in northern Alberta.
Underneath the muskeg lie the oil sands, by some measures the world's largest petroleum reserves outside Saudi Arabia. To tap the deposits, companies such as Royal Dutch Shell Plc are paying record prices for undeveloped land. Already this year, the province of Alberta has raised more money from oil sands leases than the record amount earned in all of 2005.
The oil sands have “become the Beverly Hills of the oil patch,'' said Gregg Scott, president of Calgary-based Scott Land & Lease Ltd., Canada's biggest land broker. “This is the most high-profile play I've seen in my 24 years as a broker.''
Producers such as Shell Canada Ltd., the Canadian arm of Royal Dutch Shell, are searching for new sites to develop oil sands as Asian countries buy more fuel and the U.S. seeks supply alternatives to the Middle East. U.S. Treasury Secretary John Snow toured the oil sands last year, the first visit by a Treasury secretary to Canada in two decades.
Oil companies will spend about C$73 billion ($63 billion) in the next 20 years to boost output in Alberta, according to the province's Energy Ministry. Part of that will be spent on new sites.
Synenco Energy Ltd., developing a C$5.3 billion project with China Petrochemical Corp., also known as Sinopec, kicked off the rush last September by paying a then-record C$75.9 million for 9,216 hectares (22,763 acres). Calgary-based Synenco paid 3,298 times the minimum price of C$23,040.
`Whooping Sounds'
“We were quite nervous about it,'' said Todd Newton, Synenco's 43-year-old president. He found out Synenco got the land after hearing “a loud whooping sound'' from the desks outside his office, where employees were monitoring the government Web site.
That exuberance hasn't abated. A record for a land package was set Feb. 8, bringing Alberta's total for oil-sand land sales to C$846.3 million from three auctions this year. That eclipsed the old record of C$433.1 million set in 2005 from 21 auctions, according to provincial government data.
Alberta's tar-like reserves cover an area almost as big as the state of Florida. The oil sands, 750 kilometers (466 miles) north of Calgary, are estimated to contain 175 billion barrels of recoverable oil, second only to Saudi Arabia's 259 billion barrels, according to the Canadian Association of Petroleum Producers. The oil sands have helped Canada become the biggest supplier of oil to the U.S.
Prices Double
Producers and land agents, used by some companies to disguise their identities, paid C$867 per acre for leases this year, almost double the amount paid last year.
Oil sands output in Alberta is forecast to triple to about 3 million barrels a day in the next nine years, according to a report from Calgary brokerage FirstEnergy Capital Corp. in December. That would almost equal the current output from OPEC members Algeria and Libya combined.
Compared with multibillion-dollar investments to build a mine and a refinery, land is the cheapest cost for oil-sands projects, said Wilf Gobert, vice chairman of Peters & Co., a Calgary brokerage.
“There's a bit of a mentality in the industry that if you don't have the land, then you're short of luck,'' said Gobert, an oil analyst for more than 30 years.
Some clients were “blown away'' after losing land auctions to bids triple their offer, land broker Scott said. Some properties sold this year aren't in areas with proven output, so the land rush depends on owners being able to economically produce oil from these leases, he said.
Strip Mining
If the deposit is less than 75 meters underground, the oil can be extracted through strip mining, which can cost C$25 a barrel, compared with C$12 for traditional pumping. If the reserves are deeper, companies inject steam into the ground to soften the heavy oil, or bitumen, to extract it.
Companies are more willing to use the expensive methods because they're confident the projects will be profitable as rising demand boosts prices, Gobert said. Most oil sands deposits are economically feasible as long as oil prices are higher than $30 a barrel, or about half the current price of crude.
Even if these projects are never developed, there is one clear winner from the land auctions: the Alberta government and the province's taxpayers.
Thanks to surging oil and gas revenue, Alberta has recorded budget surpluses for the past 12 years, making the province the only debt-free region in Canada. Premier Ralph Klein this month sent each man, woman and child in the province a check for C$400 — known as “Ralph Bucks'' — to share the wealth.
To contact the reporter on this story:
Ian McKinnon in Calgary at [email protected].

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