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Cenovus open to Chinese investment

Cenovus's extensive oil-sands resources mean "decades of double-digit growth". And the firm may accelerate development through a series of partnerships – possibly with Chinese investors, says Chief executive Brian Ferguson

CANADIAN Cenovus Energy is considering partnerships, farm-outs or divestitures to accelerate the development of some of its assets and says potential collaborators could include Chinese companies. "A variety of companies have expressed interest," chief executive Brian Ferguson tells PE. "It's not specific to the Chinese. But it could be [Chinese companies]."

The industry must also expand heavy-oil pipeline capacity to Canada's west coast to accommodate growing exports to China and other Asian markets, although capacity should be sufficient for the next two years, he says. "As an industry, we need to expand existing pipelines and build new pipelines to the west coast."

All the same, the US is likely to remain Cenovus's main long-term market and the firm also wants to expand its pipeline capacity to the US Gulf Coast. "In 10 years' time, I expect most of our oil still to be in the US market."

Even if US oil demand has peaked – as the International Energy Agency believes – dependable Canadian oil should remain in strong demand south of the border, says Ferguson. "Having a growing source of oil supply onshore North America, destined for the US, would be a good thing in continuing to meet overall US oil demand."

And environmental objections in the US to Canadian heavy oil are unfounded, he says: greenhouse gas emissions from Cenovus's oil-sands operations are comparable with those produced by conventional oil operations.

Created in 2009, when EnCana hived off its oil assets to focus on natural gas, Cenovus sees itself as a pure-play oil company, focused on the oil sands. For now, just a quarter of its 250,000 barrels of oil equivalent a day (boe/d) comes from the oil sands; the bulk is produced from low-cost conventional oil and shallow-gas assets. But oil accounts for 84% of Cenovus's reserves base and, by 2019, the oil sands will account for two-thirds of production, says Ferguson.

Its reserves base is extremely large. In June, McDaniel & Associates Consultants, a reserves evaluator, estimated that the company owns 137bn barrels of bitumen initially in place, including 56bn discovered barrels. Says Ferguson: "We literally have decades of double digit growth opportunities in front of us."

In addition, all Cenovus's heavy oil is produced using in situ methods and that will remain the case. The company says its low steam-to-oil ratio (its oil-sands projects need an average of 2.3 barrels of water, converted into steam, to produce one barrel of oil) means less natural gas is burned to create steam – cutting emissions, water usage and costs.

Growth will be organic, achieved through expansions at its two producing oil-sands projects – Foster Creek and Christina Lake (owned jointly with ConocoPhillips) – and through new ventures, including Narrows Lake and Grand Rapids. Cenovus expects its oil-sands output to rise from around 55,000 barrels a day (b/d) to 300,000 b/d by 2019.

In addition, some assets not included in the company's 2019 development plan will be eligible for development under new partnerships. In total, by the end of 2014, Ferguson aims to have 0.5m b/d of regulator-approved projects on Cenovus's books. "We're very well on the way to that."

Growth will be funded from the company's own resources. "I do not foresee a need to raise external capital to fund our growth," says Ferguson. That will be made easier by Cenovus's "manufacturing approach" to building production, which will see capacity expand in 30,000-40,000 b/d chunks – "more controllable and manageable" in terms of schedule and cost than the mega-projects that have typified oil-sands development up until now. However, Ferguson is also confident there won't be a repeat of Alberta's 2005-08 boom, which caused severe cost inflation, and shortages of manpower and supplies. "I think we're in a more sustainable, healthier economic environment."

Boosting production in smaller steps will also give Cenovus greater flexibility to introduce new technologies as they become market-ready – cutting costs, increasing recovery and reducing environmental damage. In June, the company filed the industry's first regulatory application for a solvent-aided process along with steam-assisted gravity drainage at its Narrows Lake project, and expects the technology to result in a 10-15% efficiency improvement in the extraction process.

Cenovus's oil will also continue to be processed at the market end, rather than at the point of production. The heavy-oil processing capacity of the Wood River refinery – one of two US plants Cenovus owns jointly with ConocoPhillips – is being expanded from 275,000 b/d to 0.5m b/d. The extra capacity, around 80% complete, should be on stream in second-quarter 2011. And the company has no plans to build bitumen upgraders in Alberta – something the provincial government would like to see. "That is a much more costly, capital-intensive proposition than expanding a brownfield refinery," says Ferguson.

Cenovus's net asset value, according to Ferguson, will double in the next five years. The company will also maintain an attractive dividend policy – of C$0.80 ($0.76) a share annually – and will be able to consider increased dividends after 2011, as well as share buy-backs. Its low debt-to-captial ratio – 28% at the end of the second quarter – puts it in a "very strong position to weather any additional ups and downs" in the economic cycle. "I wouldn't say anyone's recession-proof, but we have tremendous flexibility and resilience."

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