Brian Ferguson, president and CEO of Cenovus Energy, addresses shareholders at the company's annual general meeting in Calgary, Alberta, April 27, 2011.Todd Korol/Reuters
Cenovus Energy Inc. abandoned its search for a joint venture oil sands partner in July. Brian Ferguson, the company's chief executive, last week explained why – and the answer is about more than Telephone Lake's price tag.
"This wasn't in any way about looking for a financially-motivated transaction. This was always about a strategic partner," he said in an interview following Cenovus' third-quarter results. "We had some very stringent criteria."
On the checklist: A partner who could help Cenovus manage the so-called light/heavy differential – the gap between the price of light oil and heavy crude. A partner with coking capacity, supply arrangements, or firm transportation agreements would have fit the bill, Mr. Ferguson said.
Canadian oil sands companies have been taking a haircut compared to West Texas Intermediate oil, the North American benchmark, because a shortage of pipeline space has created a backlog of supply. At the same time, refineries in some parts of North America are running under capacity, but getting the oil there is tricky. Or at least it was.
"One of the things that has evolved significantly over the last 18 months has been our view in terms of marketing and current transportation arrangements," Mr. Ferguson said. "From a Cenovus perspective, I no longer see the need to really pursue something on the light/heavy differential side over and above what we can do ourselves internally."
Moving oil by rail, for example, is gaining momentum in western Canada and the United States. Trains were once considered too expensive for shipping oil, but the price differential now makes the extra cost worth it.
Cenovus' expansion at its Wood River refinery in Illinois, as well as the opportunity to further expand the facility's coking capacity, also gave the company reason to back off its search for a partner at Telephone Lake.
Cenovus was expected to rake in between $1-billion and $3-billion if it struck a deal on Telephone Lake. In July, when the data room was shuttered, Mr. Ferguson said potential partners were keen on getting oil now, rather than participating in a development project.
Mr. Ferguson said potential partners, however, are still showing interest. He said that in July, too.
Encana Corp., which spun-out Cenovus in 2009 , last week said it is having difficulty finding a partner on one of its North American projects, although it is a natural gas effort. The joint venture market, Encana said, is flooded, giving potential partners negotiating power.
The Calgary-based company hopes it will be able to strike deals – which it desperately needs to keep its balance sheet in order – by breaking up one of the large packages it has on market. While a number of oil sands companies are looking for partners, Cenovus' Mr. Ferguson said Telephone Lake was not yanked for this reason.