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One partner, two deals for ConocoPhillips

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    Charles Randall

    The Houston-based company and Canada’s EnCana will invest a combined $10.7 billion to gather and process heavy oil
    By KRISTEN HAYSCopyright 2006 Houston Chronicle
    One has lots of dirty, heavy oil. The other has refineries that could potentially turn it into hundreds of thousands of barrels a day of gasoline and diesel fuel.
    On Thursday Canada’s EnCana Corp. and Houston’s ConocoPhillips announced plans to contribute those assets to a pair of marriages with a potential dowry of more than $10 billion.
    The two companies announced plans to form two partnerships — one focused on exploration and production, the other on refining — to gather and process heavy oil. The companies will share a 50/50 interest in each partnership.
    The companies will collectively invest $10.7 billion over a decade into the ventures to increase production and refining capacity of the crude that is more difficult to process than light, sweet crude because it contains more impurities that must be filtered out.
    “I think it’s a win-win transaction from the standpoint of both participants,” said Mark Gilman, an analyst with the Benchmark Co.
    The independent research house CreditSights said the deal allows ConocoPhillips “to improve and increase its access to a large North American resource base” that is more stable than other international markets.
    Investors appeared to approve. ConocoPhillips shares rose $1.10, or nearly 2 percent, to close at $57.88. Calgary, Canada-based EnCana shares closed up $1.56, or 3.5 percent, at $45.96.
    Jim Mulva, chairman and CEO of ConocoPhillips, said in an interview with the Chronicle that the deal spreads risk between the two companies.
    “That’s the logic behind it. EnCana does not have refineries. We have refineries, and we want more investment in oil sands,” Mulva said.
    Mulva also told analysts that ConocoPhillips’ projection of 3 percent growth in annual production through 2010 remains unchanged, although the deal with EnCana “gives us a little more certainty in being able to deliver that with this heavy-oil position in Canada.”
    But Fadel Gheit, an analyst with Oppenheimer & Co., said refining and upgrading projects “are notorious when it comes to cost overruns” and the investments may or may not be successful over the long term, depending on fluctuations in oil prices and industry costs.
    “Cost overrun is a real factor. Uncertainty about oil prices, obviously, is another real factor,” he said. “Things could change dramatically over the next 10 years and that would have a big impact.”
    Using a baseball analogy, he called the deal “a single or a double at best. It’s not a home run.”
    The first partnership focusing on exploration and production will consist of EnCana’s Foster Creek and Christina Lake projects in the eastern part of the Athabasca oil sands in northeast Alberta. EnCana will be the operator and managing partner of the venture.
    Those oil sands contain bitumen, or oil-soaked sand, that turns into a sludgelike liquid after an extraction process that involves use of steam to melt it so it can be pumped to the surface, diluted with water or synthetic oil, and transported via pipeline. The two projects have more than 6.5 billion barrels of estimated recoverable bitumen, the companies said.
    That partnership plans to invest $5.4 billion in the next 10 years to increase current production of 50,000 barrels per day to 400,000 barrels per day by 2015.
    Then the venture will transport and sell a 50/50 blend of bitumen and synthetic oil at major Alberta trading hubs.
    The second partnership focusing on refining will invest $5.3 billion to expand heavy oil processing capacity at ConocoPhillips’ refineries in Roxana, Ill., and Borger, Texas, from about 60,000 barrels a day to 550,000 barrels a day by 2015.
    ConocoPhillips will be the operator and managing partner of the second venture.
    The expansion will increase bitumen handling capacity to 275,000 barrels a day from 30,000 barrels a day. Total throughput at the two refineries will jump to 600,000 barrels a day from 450,000 barrels a day.
    The partnership may further increase heavy-oil processing at the two refineries or in Alberta to match bitumen production, Mulva said.
    Although ConocoPhillips and EnCana will each own half of the refining partnership, ConocoPhillips will have a higher economic interest in the Borger refinery for two years: 85 percent in 2007 and 65 percent in 2008.
    Mulva said the companies agreed to form the partnerships because neither side wanted to sell their refinery and oil sands assets outright to the other.
    Randy Eresman, EnCana’s president and chief executive officer, told analysts that both sides negotiated a contribution of assets to each partnership “to the point where we were comfortable that each party was getting a fair deal.”
    The transaction is expected to close Jan. 2, pending final agreements and regulatory approvals, and directors from each have approved it. Each partnership will have six-member management committees — three representatives from each company — with equal voting rights, but who will serve has yet to be determined.
    Personnel associated with the partnerships will remain employed by their current companies.

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