Canadian Oil Sands becomes largest stakeholder in Syncrude project

By OGJ editors

HOUSTON, Feb. 4 -- Canadian Oil Sands Trust, through its wholly owned subsidiary Canadian Oil Sands Ltd., reported Monday it will acquire an additional 10% interest in the Syncrude oil project from Calgary-based EnCana Corp. for $1.07 billion (Can.). The Syncrude project—a joint venture operated by Syncrude Canada Ltd. near Fort McMurray, Alta.—is the world's largest producer of light, sweet crude from oil sands and the largest single source of oil in Canada.

In addition, EnCana granted Candian Oil Sands an option to purchase—on similar terms and before yearend—EnCana's remaining 3.75% share in the project and an overriding royalty. If exercised, the option would generate additional proceeds of about $417 million, EnCana said.

The Syncrude transaction is expected to close by the end of the month, with an effective date of Feb. 1. EnCana's 13.75% interest in Syncrude is held by two subsidiaries: AEC Oil Sands LP (10%) and AEC Oil Sands Ltd. Partnership (3.75%).

EnCana's refocused strategy
For EnCana, the sale will be a "strategic realignment" that will focus the company on its "operated, high-working interest conventional oil and gas properties," said Gwyn Morgan, president and CEO. "A minority ownership in Syncrude does not fit these criteria but is ideal for a royalty trust investment."

Instead, Morgan said, EnCana will concentrate its oil sands strategy "on developing its high quality resources, recovered through steam-assisted gravity drainage (SAGD), on 100% owned and operated lands at Foster Creek and Christina Lake." The company estimates that there is more than 30 billion bbl of heavy oil in place on its properties in northeast Alberta. "With the implementation of SAGD, a new generation of oil sands technology, it is anticipated that these lands are capable of the lowest unit production cost in the industry," EnCana said.

At Foster Creek—the world's first large-scale commercial SAGD project—EnCana is producing 20,000 b/d of oil. Construction on Foster Creek's first expansion, which will expand production by 10,000 b/d, is under way and is expected to come on stream in the first quarter of 2004. The company's second project, a demonstration scale SAGD facility at Christina Lake, is producing about 3,500 b/d of oil.

Reaction
Following Canadian Oil Sands's announcement to acquire the stake in Syncrude, Moody's Investors Service confirmed the firm's Baa2 senior unsecured debt rating with its ratings outlook remaining negative.

The negative outlook, Moody's said, was related partially to Canadian Oil Sands's "increasing financial leverage due to capital spending requirements needed to fund Syncrude's Stage 3 expansion project that are expected to result in (the company) being in a significant net cash shortfall position in 2003 and 2004. . .(and) a distribution policy that could result in a larger percentage of operating cash flow being distributed to the trust unitholders than was distributed historically. . . ."

Moody's also stated that the company's negative outlook hinged on ". . .the possibility of additional cost overruns or delays, and. . .the possible negative price impact of significant incremental barrels coming into the market from other large oil sands projects expected to commence production during 2003 and 2004."

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