Canadian Natural Resources Buying Upgrading Plant, Further Expansion of Oil Sands

Jeffrey Jones, Reuters, January 28, 2010--Canadian Natural Resources Ltd., the country's biggest independent oil explorer, is buying into a multibillion-dollar upgrading plant that was stalled by the financial crisis, the latest in a raft of announcements showing the oil-sands sector on the rebound.

Canadian Natural said it will buy 50% of privately held North West Upgrading Inc., which plans to build an upgrader near Edmonton for an undisclosed sum.

The two companies will apply to take advantage of an Alberta program aimed at stimulating processing of its vast oil sands within the province, rather than shipping the resources and jobs elsewhere. They hope the government will supply 75%, or 37,500 barrels a day, of the raw bitumen for the plant from volumes it will take in from developers in lieu of cash royalties. Canadian Natural, one of Alberta's largest producers of heavy oil and oil sands, would supply the rest.

"We're planning for startup in 2013, and one of the things we have to do is secure the feedstock, so we're making a proposal to the Alberta government to process their bitumen royalty volumes," said Ian MacGregor, chairman of North West.

If all the pieces fall into place, construction could start in 2011, Mr. MacGregor said.

The companies gave no cost estimate for the plant, which is designed to turn extra-heavy crude into low-sulfur diesel fuel and other petroleum products.

North West had previously said the plant would process 231,000 barrels a day, starting with a 70,000-barrel-a-day phase costing about $4-billion. That capacity is made up of 50,000 of raw bitumen and the rest light fuel used to move the crude in pipelines.

North West deferred construction plans as the credit crisis took hold in 2008. It said last year that the Alberta government's bitumen-in-kind proposal had the potential to put the project back on track.

"It's a pretty good strategic move for Canadian Natural, because they are taking a long-term view on protection in terms of where heavy oil versus light oil differentials end up being," analyst Chris Feltin of Macquarie Securities Canada said.

Over the past two years, the price spread between the two grades of crude has been narrow, due to high demand for the thicker oil from U.S. refineries in the Midwest and Gulf Coast, hurting profit margins for upgraders. However, as more oil-sands projects in Canada and heavy-crude developments around the world start up, the discount could increase again, Mr. Feltin said.

In the past two weeks, several companies have announced they are proceeding with oil-sands projects in the first flurry of activity since the financial crisis forced the deferral of as much as $90-billion worth of investments in the sector.

ConocoPhillips Co. and Total SA will proceed with the second phase of their Surmont project, Husky Energy Inc. and BP PLC are nearly ready to go ahead with their $2.5-billion Sunrise venture, and Canadian Natural aims to approve the expansion of its Horizon oil-sands project and construction of its Kirby development by year-end.

Also on Thursday, Enbridge Inc said it will spend $250-million boosting pipeline capacity to the Christina Lake, Alta., oil-sands project run by Cenovus Energy Inc. and ConocoPhiillips. The proposed upgrading plant would use gasification to convert the heaviest parts of the bitumen into hydrogen to cut the need for natural gas in the processing. Carbon dioxide would be piped to old oil fields to boost production there. The transaction is expected to close later this year.

Canadian Natural shares were off 72¢, or 1%, at $69.17 on the Toronto Stock Exchange, amid a broad-based sell-off.