The Guardian: BP to pump billions into oil sands despite green worries and high costs

· Deal comes as Opec refuses to raise output
· Strong demand and high crude price tempt UK firm
 
Mark Milner
Thursday December 6 2007

BP teamed up yesterday with the Canadian oil group Husky Energy in a multibillion-dollar deal that will give the UK group a strategic presence in oil sands for the first time. BP is following Shell in investing heavily in oil sands but there has been criticism from green groups over the environmental impact of extracting the oil.

BP will take a half share in Husky’s Sunrise oil sands field in Alberta with the Canadian group taking a 50% stake in BP’s Toledo refinery in Ohio. The refinery will be upgraded to cope with the extra heavy crude output from the Canadian field.

The two companies are to invest about $5.5bn (£2.7bn) in the refinery and developing the field. Industry estimates suggest that adding in the value of the assets involved would make the development worth more than $10bn.

Oil sands are a mixture of sand, water and heavy crude, which is difficult and expensive to extract. But with oil prices close to $100 a barrel and demand rising rapidly, Canada’s deposits are proving attractive for leading oil companies.

Prices rose a further $2 a barrel yesterday after Opec, the producers’ cartel, decided not to raise output. But the market slipped in later trading after US inventory figures proved stronger than expected.

Concerns remain about the longer term outlook for energy prices despite Opec’s assurances that it was already pumping enough oil to meet demand.

The Alberta oil sands deposit is the second-largest proven oil reserve in the world even though only 10% of the oil is accessible with current technology. It is strategically important because governments are keen to develop supplies from outside the Middle East and the influence of Opec.

BP’s new chief executive, Tony Hayward, said yesterday: “Toledo and Sunrise are excellent assets. BP’s move into oil sands is an opportunity to build a strategic, material position and the huge potential of Sunrise is the ideal entry point for BP into Canadian oil sands.”

Under its former chief executive Lord Browne, BP had been reluctant to invest in oil sands on cost grounds but the tie-up with Husky, controlled by the Hong Kong billionaire Li Ka-shing, will give BP a key position.

The first phase of development is expected to see the field producing 60,000 barrels of oil a day by 2012, with 200,000 expected by 2020. It is thought the field can sustain that level for about 40 years.

The Toledo refinery has a capacity of 155,000 barrels a day, including 60,000 barrels of heavy oil. It will be expanded to handle 170,000 barrels of heavy oil and bitumen a day by 2015.

A BP spokesman said the field would be economic with an oil price in the low forties (dollars a barrel). North Sea crude was trading yesterday at about $90, having neared a record $100 in November.

Opec was split over the need to increase production and curtail price rises at its recent meeting. Some producers, including Saudi Arabia and Kuwait, are understood to share their customers’ concerns about the impact of higher prices on the wider economy. Those were reinforced by the Bank of Canada’s decision on Tuesday to cut a key interest rate for the first time in three years because of concern about the impact of the slowdown across the border. The investment bank Merrill Lynch has warned that central banks on both sides of the Atlantic will have to cut rates to prevent a recession led by higher energy and food prices.

But the Opec secretary general, Abdullah al-Badri, said: “There is no reason for the [oil] price to go high because we have enough stocks. There is no reason whatsoever for prices to go up to $100.”

Opec’s president, Mohammed bin Dhaen al-Hamli, said the market was being driven by sentiment rather than fundamentals, making it harder for producers to control prices. “A widespread perception of market tightness and the fear of future shortages have fuelled increasing market speculation. Increased speculation has detached prices from fundamentals.”

After hitting $99.29 on November 21, oil prices have fallen by 10% because of concerns that the US could slide into a recession, sharply reducing its appetite for oil.

Helen Henton, head of commodity research at Standard Chartered, said: “I think [the agreement to hold production] shows that Opec are worried about what’s happening to demand so they don’t want to flood the market with oil. Given that the price has been falling for the past few days, they probably didn’t want to send a very strong bearish signal.”

Nobuo Tanaka, executive director of the International Energy Agency, said: “Winter demand is as variable as the weather. The market is clearly uncomfortable that it has lost some stock cover in recent months and with prices near $90 a barrel, it is telling producers it wants to see that flexibility restored.”

Gas sales

Russia’s Gazprom, one of the world’s largest oil and gas producers, said yesterday that first-half pre-tax profits fell slightly, from 447.6bn roubles (£9bn) to 442.1bn roubles. It blamed warmer weather for lower exports to Europe and increased costs of buying gas in central Asia. Staff costs were also higher. Gas sales in its domestic market and to former Soviet Union countries were ahead of last year’s. Its shares rose on the results. “While we expect Gazprom’s margins to deteriorate slightly … higher gas prices should compensate for growing costs next year,” Uralsib Bank’s Yevgeniya Dyshlyuk said.

http://www.guardian.co.uk/business/2007/dec/06/bp.oil