Occidental Petroleum Steps Into Shifting Oil Sands

(MoneyWatch) 

• The Company: Occidental Petroleum, the fourth largest U.S. oil and gas company by market cap.
• The Document: News Release, "Occidental Petroleum to Acquire Interest in Joslyn Oil Sands Project" -- June 23, 2008.
• The Finding: Occidental is acquiring 15 percent of the multibillion-dollar Joslyn oil sands project in northern Alberta. But the move may not be a prudent means of adding to its slowing oil/gas reserves growth rates.

The Upshot: Occidental is paying $492 million for the Joslyn stake. Industry analysts lauded the move, for it gives the company a footprint in one of the biggest developing oil plays in the world. The project is still in the exploratory stage, but Occidental expects net recoverable reserves of about 370 million barrels. Production is scheduled to begin in 2014, after which Occidental expects to net about 11,000 barrels of oil per day, eventually growing to approximately 31,000 barrels per day.

Although Alberta's oil sands rival Saudi Arabia's oil reserves in size, the process of removing the tar from the sand limits its economic recoverability -- thanks to direct mining costs, a shortage of skilled workers, and the natural gas and fuel needed to extract the crude -- compared to conventional oil. Roughly four tons of soil are needed to produce one barrel of oil.

Development delays will likely further increase costs, too. The 100,000-barrel per day oil sands project, originally scheduled to come on stream in 2013, slipped behind its timetable last month. Regulatory hearings now won't begin until the end of the year, instead of during the first half. In addition, last October Alberta decided to raise fees charged to oil and gas companies in the province. Starting in 2009, the government will increase its take of royalty revenues by some 20 percent.

Joslyn marks Occidental's re-entry into Canadian oil tar, eight years after it sold its stake in Canadian energy explorer Nexen (formerly Canadian Occidental) for $700 million because management didn't think oil-sands projects would be profitable given oil prices of $27 a barrel at the time.

The cost of developing Joslyn isn't cheap -- Occidental plans to invest roughly $2 billion in the project. Although the company may have little choice, as it seems to be drilling dry holes with respect to other reserve acquisitions. In 2007, in fact, Occidental increased its proven reserves by only 1.2 percent to the equivalent of 2.87 billions of barrels of oil, principally due to acquisitions in the U.S.

The Question: Despite the current price of oil, are the economics sufficiently more attractive now to warrant Occidental's return to an area it abandoned in 2000?