Shuffling the Deck in the Canadian Oil Sands (TOT, SU, TCK, OXY, COP, SNP)

French oil major Total SA (NYSE: TOT) and Canada’s Suncor Energy Inc. (NYSE: SU) have agreed to form an alliance that combines the two companies’ interests in a number of projects in the oil sands of Canada’s Alberta province.

Total will pay about $1.74 billion to Suncor to gain an additional 19.2% stake in Suncor’s Fort Hills project and a 49% stake in Suncor’s Voyageur upgrader project. The deal bumps Total’s interest in the Fort Hills project to 39.2%. Suncor owns 40.8% of the project and is the operator. Teck Resources Ltd. (NYSE: TCK) owns the remaining 20% and is not involved in this deal.

In exchange for the stake in the Voyageur project, Total passes a 36.75% stake in its Joslyn project to Suncor, retaining 38.25% for itself. Total will be the operator at Joslyn. Occidental Petroleum Corp. (NYSE: OXY) owns 15% of the project and Japan’s Inpex owns the remaining 10%, and neither is involved in the announced deal.

Total will also cancel work on an upgrader it had planned as part of the Joslyn project. Instead the Voyageur upgrader will process the bitumen from both Fort Hills and Joslyn at a rate of 200,000 barrels/day once the upgrader is completed, now scheduled for 2016. Suncor expects to more than double its output by 2020, to more than 1 million barrels of oil equivalent per day.

Total’s history in the oil sands is a bit rocky. The company tried in 2009 to acquire UTS Energy, a partner with Suncor and Teck in the Fort Hills project, for about $830 million. Finally in July 2010, the French company coughed up about $1.5 billion for UTS to get its initial 20% stake in the Fort Hills project. Now Total owns nearly 40% of a deposit estimated to equal 3.4 billion barrels of oil equivalent. Total also owns 50% stakes in two other oil sands projects, Surmont (a 50/50 joint venture with ConocoPhillips Corp. (NYSE: COP)), and Northern Lights, another 50/50 joint venture with China Petroleum & Chemical Co., or Sinopec, (NYSE: SNP).

Oil sands development has gotten hammered by environmental groups for its destruction of the environment, its greenhouse gas emissions, and its nearly unquenchable thirst for water. However a report issued by Royal Society of Canada scientists downplays the impacts of oil sands mining but does note that the development accounts for 5% of Canada’s greenhouse gas emission and that as the industry grows so will emissions. The report also states that there is a need to review the adequacy of the financial reserves meant to pay for environmental disasters and to repair damage when projects shut down.

Total committed itself to oil sands development as a way to build its proved reserves at a reasonably affordable price. Even the massive costs of developing an oil sands project pales compared with developing ultra-deepwater reserves.

Paul Ausick