French energy giant Total SA's sale of a 10-per-cent slice of a major oil sands mine highlights a growing split between companies that are retreating from northern Alberta and a select few that are digging deeper to find value as crude prices tumble.
Total on Monday said it agreed to sell down its holdings in the $15-billion Fort Hills mine to partner Suncor Energy Inc. for $310-million. Suncor is also assuming about $700-million in new spending commitments under the deal, which boosts its ownership stake in the joint venture to 50.8 per cent. Total's share of the project shrinks to 29.2 per cent.
Calgary-based Suncor said the transaction will help it lower its per-barrel costs at the mine once the project begins pumping crude in late 2017. Analysts said the deal makes sense for Suncor, allowing the company to gain a majority stake in a project where construction is now 40-per-cent complete.
Total maintains a presence in northern Alberta. It recently began production from its steam-driven Surmont bitumen asset, a joint venture with ConocoPhillips Co. But the sale marks another retreat by one of Europe's biggest energy companies from the oil sands, underscoring concerns about the profitability of megaprojects as companies grapple with the sharp plunge in U.S. and world crude prices to less than $50 (U.S.) a barrel.
"As a result of a full comparative analysis of its global portfolio in the context of lower oil prices, Total has decided to reduce its exposure to Canadian oil sands projects," Arnaud Breuillac, the company's president of exploration and production, said in a statement announcing the move.
The sudden pullback by major companies has stirred anxiety about future investment in the oil sands – a sharp reversal after years of big spending and torrid growth.
Total joins Norway's Statoil ASA and Anglo-Dutch super-major Royal Dutch Shell PLC in scaling back ambitions in a region where companies have struggled for years to tame spiralling costs and boost access to more lucrative overseas markets.
"It's not just Total. Foreign capital has been a big source of the fuel for oil sands growth," said Jackie Forrest, vice-president at ARC Financial in Calgary.
Fort Hills, located about 90 kilometres north of Fort McMurray, Alta., will add 180,000 barrels per day of new capacity in northern Alberta over time.
But the mine is the last in a trio of megaprojects to survive from a multibillion-dollar joint venture struck between Total and Suncor in 2010. Two other projects under the agreement – the Voyageur upgrading plant and a separate, $11-billion (Canadian) mine called Joslyn – have since been scrapped due to shaky economics.
The other partner in the project, Teck Resources Ltd., has been squeezed by sinking prices for coal and copper. Teck owns 20 per cent of the project.
Still, analysts said Suncor stood to benefit from lower per-barrel costs once production ramps up. The deal's price tag, including $700-million in additional spending, translates into a cost of roughly $56,000 per flowing barrel of production – about two-thirds of what it would have cost Suncor to build on its own, according to Michael Dunn, an analyst at FirstEnergy Capital Corp. in Calgary. "We view this as a positive acquisition for Suncor," Mr. Dunn said in a note to clients.
Suncor said the added spending this year as a result of the transaction would be covered within its current budget of $5.8-billion to $6.4-billion.
The deal also breaks a dry spell of merger-and-acquisition activity, particularly transactions involving oil sands assets. There has been speculation that low oil prices would prompt a flood of deal-making, but companies have so far been reluctant to sell assets at cut-rate prices.
"The transaction is significant as it is the first oil sands transaction since Osum Oil Sands Corp.'s acquisition of the producing Orion project from Shell Canada in June, 2014," Menno Hulshof, an analyst at Toronto Dominion Bank, said in a note.