ConocoPhillips has many assets all over the globe. Presently as it attempts to focus its energies on the U.S. shale oil industry, its assets in the Alberta oil sands region are on hold. Is there a problem for investors if COP continues to hold on to these assets and doesn't sell them?
Are Oil Sand's Assets a Burden Right Now?
While COP has been divesting itself of other energy properties around the world, it has changed its mind on selling its Canadian oil sands assets because it already exceeded its target of raising capital by divesting in the other projects around the world.
ConocoPhillips intended to sell off some of its Canadian oil sands in an attempt to rebalance its portfolio and adjust to the changing world economy. The idea was to divest itself of higher cost projects and focus on devoting more cash to U.S. shale oil projects. It was looking at options to sell at least its 50% interest in the Surmont, Foster Creek, and Christina Lake oil sands projects in Alberta, while it focused more of its "unconventional oil production" from South Texas Eagle Ford shale and the North Dakota Bakken formation.
The Alberta oil sands project has been a challenge to companies for a number of reasons. The environment overall for selling Canadian oil reserves has been a challenge and one of those challenges is due to the new supply from U.S. oil fields. This is causing problems for the Alberta oil sands region. Not only do companies need deep pockets here, but there are political and technical challenges. Skilled labor continues to be hard to find as employees go south into the United States. Producers in Alberta have had to sell their crude at larger discounts compared with the overall North American benchmark.
Is the company holding the property in Alberta because it is so valuable, or is it just hard to sell right now? State-controlled energy companies are not allowed to acquire majority stakes in the oil Sands and last December some rule changes have caused some analysts to believe that the value of oil sands projects would be depressed.
Other companies besides COP have pulled their oil sands properties off the sales floor because present offers are just not up to expectations. Royal Dutch Shell has its Orion steam-driven development in Alberta that was valued at $200 million but the company could not find any buyers at that reflected value.
In the present economic environment, starting capital intensive projects from the ground floor seems to have too many economic and political risks right now. For this reason investors are looking for better places to put their money. Some of these projects are offering "single - digit" returns on investments. They have operational and political risks and investing money in the long term project for a possible 8% return in this environment just doesn't look inviting.
Transporting the Crude is the Future key to Productivity
Oil sands pipelines, especially the Keystone pipeline, need to be built otherwise the problem of price discounts in the region will persist and expansion will slow down while other areas of North America production boom.
It is understandable why the oil sands region will need these pipelines if any long-term projects are going to persist there. With the North American boom in energy growth, supply growth is projected to outstrip the demand over the next five years. This would result in a natural buildup and keep prices low.
I can understand why COP would be in no hurry to sell its oil sands projects in this environment and elect to hold on to them. They could be worth more in the next 3 to 5 years if pipelines could get built.
Even though oil sands production is forecast to grow, over the next couple years it is expected to be slow because Alberta's landlocked and the infrastructure needed to move that oil is just not there.
As production slowly continues to increase, it will exceed current pipeline capacity. This is causing producers to offer significant discounts for buyers to even look at the oil. The differential between Western Canada Select and the benchmark West Texas Intermediate has averaged $25 (U.S.) a barrel so far in 2013. Producers don't want to develop the region when they have to continually sell at steep discounts because they can't move the crude. For this reason, I don't see any major production taking place in the short term.
Not only is the Keystone XL pipeline important to get rid of these discounts, but Canada is also experiencing growth in its light tight oil- better known as shale oil and this just expounds the lack of export capacity. But clearly it is the controversial Keystone XL pipeline that is keeping the steep discounts on Alberta crude alive. As with all pipelines wanting to go through the United States to the Gulf, environmental concerns are at the forefront and that's why it has not received approval yet. Rail transportation is an alternative, but it's expensive and could slow projects even more because it's going to eat into production margins.
Affect Upon ConocoPhillips?
I don't think this will have any adverse affect upon ConocoPhillips. The company has easily raised the billions of dollars it intended to buy selling assets in other part of the world so it can focus on the light tight oil here in the United States.
Presently it is holding on to its assets in Alberta because it hasn't found any interested buyers that are willing to pay what it considers the value of its property. The building of the Keystone XL pipeline will be a major factor in erasing the steep discounts in Alberta crude. If and when approval takes place, we might see the company either begin production or put its assets up on the auction block again. If the steep discounts are done away with, it is more likely that interested investors will pay more (closer to real value) for the property.