Canadian Oil Sands Trust, through its wholly owned subsidiary Canadian Oil Sands Ltd., reported 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 production 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%.
In other recent company news:
- Findlay, Ohio-based Marathon Ashland Petroleum LLC (MAP) and Texas Eastern Products Pipeline Co. LP (TEPPCO) Monday reported signing a definitive agreement to pay $20 million each to increase to 50% each their ownership in Centennial Pipeline.
- Marathon Oil Corp. reported that its board amended the company's shareholders' rights plan, accelerating the final expiration date to Jan. 31, more than 6 years earlier than originally specified in the plan. The decision has some analysts wondering whether the company might be positioning itself for a spinoff or buyout.
- Amerada Hess Corp. recorded an after-tax impairment charge of $530 million in the fourth quarter to reduce the carrying value of Equatorial Guinea's Ceiba offshore oil field.
- Russia's Sibur Co. and OAO Sibneft have signed a memorandum of understanding to establish a natural gas processing joint venture—to be called CJSC Noyabrsk Gas Energy Co. (NGEC)—which will be based at the Muravlenkov gas processing plant and compressor station in the Noyabrsk region of the Yamal- Nenets Autonomous District of Russia.
- India has approved the sale of Shipping Corp. of India's (SCI) 20% stake in the LNG transport company Greenfield Holding to Japan's Mitsui OSK Line (MOL).
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' 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' "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 "Uthe possibility of additional cost overruns or delays, andUthe 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."
Centennial deal
Currently, the 795 mile, 210,000 b/d Centennial refined product system is one third owned by MAP; CMS Panhandle Eastern Pipe Line Co., a unit of CMS Energy Corp.; and TEPPCO; a unit of TEPPCO Partners LP. Now, MAP and TEPPCO will purchase equal parts of CMS Energy's stake. Marathon Ashland Pipe Line LLC, a wholly owned unit of MAP, will serve as operator of the pipeline system. MAP is owned 62% by Marathon Oil Co.—a unit of Marathon Oil Corp.—and 38% by Ashland Inc.
In late 2002, CMS Energy announced plans to sell its pipeline unit and its ownership interest in Centennial, which transports petroleum products from the US Gulf Coast to the Midwest.
Also in late 2002, CMS Energy announced the sale of CMS Panhandle Cos. to Southern Union Corp. as a part of its ongoing asset sales program (OGJ Online, Dec. 23, 2002). "The asset sales program is part of CMS Energy's continuing efforts to strengthen its balance sheet and liquidity, as well as to increase financial flexibility," the Dearborn, Mich.-based integrated energy company said.
"We view Centennial as a strategic investment in our downstream business, which has already provided additional capacity that enabled TEPPCO to transport record refined product volumes in 2002," said Barry R. Pearl, president and CEO of the general partner of TEPPCO.
The Centennial transaction is expected to close in mid-February.
Marathon in play?
Marathon's decision to change the shareholders rights plan expiration date was made during an April 2002 shareholders' meeting. "The majority of shares voted were in favor of a shareholder proposal to redeem or terminate Marathon's existing shareholders' rights plan unless it had been approved by a shareholder vote at the next shareholder meeting," Marathon said in a statement.
"The board of directors believes that amending the plan to accelerate its expiration date is a responsible and appropriate response to the 2002 shareholder vote. The board reserved the right to adopt a new plan in the future, consistent with its fiduciary responsibilities," Marathon said.
Meanwhile, Marathon's announcement has raised the eyebrows of at least one industry analyst. Tyler Dann, analyst with Banc of America Securities LLC said, "While not ruling out the possibility, we believe it would be challenging for a suitor to swallow the entire company. However, many possibilities exist for large asset sales or a spinoff (or) carve-out."
In a research note, Dann went on to say that MAP's refining base "could certainly stand alone."
And upstream assets, such as Marathon's Equatorial Guinea and Powder River basin properties, Dann said, "would make attractive packages."
Dann added, "In our December 2002 meeting with CEO Clarence Cazalot, it was made clear that the company would not be opposed to entertaining bidders down the road. (The Jan. 30) decision to remove a defensive obstacle would unquestionably support that notion and, at the very least, may be seen as putting the company into play."
Amerada's Ceiba writedown
Amerada's Ceiba writedown caused the company to report a net loss, including special items, of $371 million for fourth quarter 2002 compared with a net income of $54 million for the same quarter in 2001.
For the full year, the company reported a net loss of $218 million compared with net income of $914 million in 2001.
"The noncash charge principally results from a reduction in probable reserves and higher field development costs associated with extending the field life," the company noted.
No revision was made to Ceiba's proved oil reserves, Amerada Hess added.
Following Amerada Hess's earnings announcement, Moody's placed under review for possible downgrade the company's Baa2 long-term debt and Prime-2 commercial paper ratings in direct response to the company's "writedown of a portion of its investment in the Ceiba field reserves…and expectations for lower oil production in 2003 and the medium term."
Moody's noted that Amerada Hess's investment in Ceiba field was one of the main assets gained as part of the $3.2 billion acquisition of Triton Energy Ltd. in 2001 (OGJ Online, July 10, 2001).
"The writedown reflects expected lower production from Ceiba and higher development costs in the medium term," Moody's said, adding, "the former primarily related to reservoir performance management issues.
"The reduced production, in combination with recent and planned asset sales for 2003, is expected to result in total production some 20% lower than originally expected in 2003 and for the next few years, during development and exploration of Ceiba and other Equatorial Guinea discoveries," Moody's noted.
Sibur-Sibneft MOU
Based on the agreement, Sibur will hold a 51% stake in the joint venture, while Sibneft will own 49% of the company. The JV's profits, however, will be split evenly between the firms.
"NGEC will focus on more effectively utilizing associated gas, improving processing quality, and increasing sales volumes. The company will also be involved in the development of electric power generation," the companies stated.
"The creation of joint investment, technology, and marketing policies by these two major Russian companies will boost available resources, expand product lines, enhance investment effectiveness, and increase supplies to this petrochemicals enterprise," the companies explained.
For the remainder of January, specialists within Sibur and Sibneft will determine the amount of capital that will be required to "develop a more detailed outline of the organizational structure" of the JV.
"The MOU outlines the sale of both associated gas and gas condensate at "mutually agreed prices" between the firms. "The infrastructure of Sibur's affiliate, Sibur-Tyumen, will be used to transport NGEC products such as tank gas and liquefied gas," the companies said.
Dmitry Mazepin, president of Sibur, noted that this partnership with a major oil producer "broadens the range of possibilities for the petrochemicals company in terms of processing and utilizing dry gas." He said, "Now, Sibur will be able to use gas to independently generate electricity. For us, this is a new business that will create additional sources of revenue, while the future diversification of our business could be an important factor in competing in the petrochemicals industry."
"This is Sibneft's second major natural gas project, following the development of the Zapadno-Ozernoye field in Chukotka," said Sibneft Pres. Eugene Shvidler. "This latest agreement will ensure more effective use of associated gas. In the future, we plan to aggressively expand the natural gas segment of our business."
India approves LNG firm sale
Under terms of the agreement, Mitsui will pay $11 million for SCI's stake in Greenfield, along with some $1.6 million to repay outstanding SCI loans and accrued interest.
Mitsui currently has a 40% stake in Greenfield, while Oman holds the remaining 40%. It is still uncertain whether the two sides would split SCI's 20% stake between them.
Greenfield was formed to own and operate the 137,000 cu m Lakshmi LNG carrier to transport LNG from Oman to India's Dabhol power plant, promoted by former energy trader Enron Corp.
Partners in the Greenfield joint venture initially included MOL 60%, SCI 20%, and Enron affiliate Atlantic Commercial 20%.
Following Enron's collapse, Atlantic Commercial sold its 20% share to Oman, which picked up an additional 20% from MOL.
The Enron collapse also dented Lakshmi's chances of a long-term time charter with Dabhol, which was annulled after the time-charterer failed to accept the vessel on its delivery in November 2001.
Upon acquiring its 40% stake, Oman deployed Lakshmi on voyage charter with Oman LNG, its 51% subsidiary, which Royal Dutch/Shell operates.