BMO helped lift BP's oilsands skepticism
Husky Partnership
Claudia Cattaneo, Financial Post Published: Thursday, January 31, 2008
CALGARY - The oilsands reached a new level of respect when BPPLC announced a basin-entry, US$11.7-billion partnership with Husky Energy Inc. in December.
The transaction surprised many because of BP's historic skepticism, under former CEO John Browne, towards Alberta's massive oilsands deposits.
But those who helped put together the landmark deal say the British oil giant actually decided three years ago it wanted to enter the business. It helped that Tony Hayward, BP's new CEO, wanted to put his own stamp on the company and picked the oilsands as his first big move in North America.
BP turned out to be a latecomer relative to other oil multi-nationals, already well-entrenched in Alberta after scooping up many of the best oilsands assets.
But Randy McLeod, president and CEO of BP Canada Energy Co., said it was more important for BP to do a deal right rather than get caught up in the oilsands frenzy.
"Being a global player, we look at opportunities globally, and we will only do these deals if the conditions are right for us and the partnership is right," said Mr. McLeod.
Shane Fildes and Dan Barclay, leaders of the BMO Capital Markets team that advised BP, said the new strategy started with a so-called beauty contest for investment bankers in London. Armed with deep knowledge from its London-based energy specialists about BP's inner workings, the BMO team put together a detailed presentation outlining all BP's oilsands options -- from simply locking up long-term contracts with producers of bitumen to supply its refineries to the United States, to making an oilsands acquisition that would have given it full ownership of a project.
"We think that was a key reason why our team got hired -- we demonstrated the best expertise in the sector in terms of oilsands, plus we showed them we could help them from Step 1 to Step 350," said Mr. Fildes, BMO's Calgary-based head of Canadian energy.
The result was two joint ventures that give BP half ownership of Husky's Sunrise thermal project, and Husky half ownership of BP's Toledo, Ohio refinery. Effectively, it's a swapping of upstream for downstream interests.
Husky runs the oilsands' end, and BP the refinery, but both can second employees to support their partners. The projects report to boards with members from both companies that set broad goals.
"We felt we had a strong position to offer in the downstream processing, and Husky happened to have a very nice asset called Sunrise in the upstream, and through discussions we happened to both agree that through the two of us combining our talents we would be more powerful," Mr. McLeod said.
The model is similar to the EnCana Corp./ConocoPhillips oilsands joint venture made in 2006.
Mr. Barclay, BMO's Toronto-based managing director of mergers and acquisitions, said the structure worked well because the two companies were reluctant to give up their assets and wanted partners with expertise they didn't have. Taxes played into their thinking, too.
Now that it has a foundation in the oilsands, BP is looking at building up. Mr. McLeod said the company has started to evaluate oilsands leases it owns in Alberta's Kirby area that could support an in-situ project producing a 60,000 to70,000 barrels a day. They are the only leases BP held on to after selling its Canadian heavy oil business to Canadian Natural Resources in 1999, which the Canadian independent developed into the Horizon oilsands project.
"We obviously held on to them for a reason," Mr. Mc-Leod said. "Options range from BP operating [a project] or looking for a partner."
Mr. Barclay sees more international oil companies moving into or expanding in the oilsands, even though provincial royalties uncertainty, capital cost inflation and uncertainty about the price of oil have tempered enthusiasm.
