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LUKE MACGREGOR

U.S.-based Devon Energy Corp. is deepening its commitment to the resurgent oil sands sector, bringing its operating know-how to a joint venture with giant BP PLC to develop the British multinational's long-dormant Kirby project.

The oil sands venture is part of a $7-billion (U.S.) deal in which Devon is selling its international and offshore oil assets to BP, while spending $500-million (U.S.) to buy a half-stake in the promising Kirby acreage, which is thought to contain up to 1.5 billion barrels of accessible bitumen.

Devon is currently doubling the capacity of its 30,000-barrel-a-day Jackfish property, and has another expansion planned for the coming years. It boasts that Jackfish is one of the industry's lowest-cost projects, using steam-assisted gravity drainage (SAGD) technology to recover the bitumen from underground.

"Given our extensive knowledge of the area, and our view of the potential of the Kirby leases, it's an asset we've been interested in for some time," David Hager, Devon's vice-president exploration and production, said Thursday. "So we view this as an exciting opportunity."

Oil sector analysts say the deal makes sense for both companies.

The big prizes for BP are Devon's assets in Brazil and in the Gulf of Mexico where the British multinational is already the leading producer of oil and gas. Devon was an early entrant in Brazil's deep-water developments, with key properties in the prolific Campos Basin.

For Devon, Kirby "is in a very good place in terms of its neighbours; the real estate is as good as it gets," said Justine Bouchard, an analyst with Raymond James Ltd. In addition to Devon's Jackfish, the BP property abuts Cenovus Energy Inc.'s Foster Creek and Christina Lake projects, which are also among the sector's low-cost projects.

"Devon increases its land position in the area quite significantly and they've had a lot of success with Jackfish ... BP gets to partner with a company that seems to be pretty intent on being a key player in the sector."

The British multinational returned to the oil sands in 2007 after a 20-year absence, through a partnership with Husky Energy Inc. that combined Husky's Sunrise project in northern Alberta and BP's refinery in Toledo, Ohio.

BP says it is still committed to the Sunrise project and expects to make an investment decision later this year, though it will take several years to develop.

Similarly, Devon executives said Thursday that it would take up to six years to get oil flowing from the Kirby project, and have committed to spending $150-million over the next few years on drilling needed to initiate development.

BP is facing pressure from activist pension funds to reduce its presence in the oil sands, but far from retreating, it has taken on a partner that is keen to proceed. The two companies intend to work out a long-term supply deal for BP's refinery in Whiting, Ind., which it is retooling to handle Canadian bitumen blends.

"Devon is an experienced operator in the Canadian oil sands with a proven track record of in situ development and production," said Andy Inglis, BP's chief executive of exploration and production.

"We expect the transaction will accelerate the development of the Kirby assets."

Devon announced last fall that it would shed its offshore and international assets to focus on North American oil and shale gas. It said it now expects to yield between $7.5-billion and $10-billion from its asset sale, roughly 50 per cent above initial estimates.

The company will use the cash to boost its North America capital program to $4.8-billion next year.

Devon Canada president Chris Seasons said the sale of offshore assets to BP should free up capital for re-investment in Canada, with projects ranging from conventional oil and gas, to the company's shale gas project in the Horn River, to the oil sands.

Mr. Seasons says the timing couldn't be better, given Alberta's move to make its royalty and regulatory regimes more competitive. "We believe the fiscal and regulatory changes will have an positive impact on our investments in the province," he said.

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