ConocoPhillips’ Bitumen Production To Rise As Cenovus Starts Production From The Foster Creek Expansion Project

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ConocoPhillips’ (NYSE:COP) joint venture partner in the FCCL Partnership, Cenovus Energy, recently announced first production from the Phase F of the Foster Creek project. The company expects production from the new unit to reach 5,000 barrels per day (bpd) by the end of this year and the peak of 30,000 barrels per day in the next 12 to 18 months. This is expected to boost the FCCL Partnership’s bitumen production, which will lead to an increase in ConocoPhillips’ equity earnings from its affiliates. [1]

ConocoPhillips is the world’s largest independent exploration and production company by proved reserves and annual production. Its daily hydrocarbon production averaged at around 1,530 thousand barrels of oil equivalent (MBOED) during the first quarter of this year, and it had proved reserves of around 8.9 billion barrels of oil equivalent (BOE) at the end of last year. Headquartered in Houston, Texas, the company has operations in 27 countries, generating annual sales revenue of more than $60 billion. We currently have a $85/share price estimate for ConocoPhillips, which is around 12.8x our 2014 full-year adjusted diluted EPS estimate for the company.

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ConocoPhillips holds around 0.9 million net acres of land in the Athabasca Region of northeastern Alberta. The company’s bitumen resources in Canada are produced using an enhanced thermal oil recovery method called steam-assisted gravity drainage (SAGD). In this process, a pair of horizontal wells is drilled into the reservoir, one above the other with a gap of a few meters between them. After this, high-pressure steam is injected into the upper well to reduce the viscosity of bitumen, which causes it to drain into the lower well, from where it is pumped out to the surface for further processing. ConocoPhillips’ 2013 bitumen production averaged 109,000 bpd, more than 88% of which came from the FCCL Partnership and the remaining 12% from the Surmont project. [2]

FCCL

The FCCL Partnership (“FCCL”) is a 50-50 joint venture between ConocoPhillips and Cenovus Energy, an integrated oil company headquartered in Calgary, Alberta. Cenovus is the operator of assets owned by the joint venture. Foster Creek, Christiana Lake and Narrows Lake are the three SADG bitumen development projects operated by FCCL. The ongoing expansion work in all these projects is expected to increase the total gross production capacity of FCCL to 750,000 bpd in the long run from around 225,000 bpd currently.

  • Foster Creek: The Foster Creek project is located around 200 miles northeast of Edmonton, Alberta. With the start-up of bitumen production from the Phase F of the project, there are currently six producing phases at Foster Creek, Phases A through F, while two more are under construction – Phases G and H. The production from Phase F is expected to reach 5,000 bpd by the end of this year, while Phases G and H are anticipated to start producing in 2015 and 2016, respectively. The production from Phase F is expected to peak at 30,000 barrels per day in the next 12 to 18 months. Apart from that, the two phases under construction along with the planned optimization of the currently producing ones are expected to add approximately 95,000 bpd of gross production capacity at Foster Creek. Last year, the FCCL Partnership also applied for a regulatory approval of Phase J of the project. Currently, public consultation process is under way for the proposed expansion.
  • Christina Lake: The Christiana Lake project is located around 75 miles south of Fort McMurray, Alberta. Currently, there are five producing phases at Christina Lake, Phases A through E, with plans underway for three additional phases – Phases F, G and H. Total gross production form the Christina Lake project increased more than 55% last year. This was primarily because of the ramp up of Phase D of the project to its full capacity in the first quarter of 2013, and production start-up from Phase E in the third quarter. The start-up of Phase E boosted Christiana Lake’s gross production capacity by 40,000 bpd. The Phase F of the project, which is currently under construction, is expected to add another 50,000 bpd of gross production capacity. It is expected to come online in 2016. The three expansion phases along with the ongoing optimization of the existing ones are expected to take Christiana Lake’s total gross production capacity to around 310,000 bpd in the long run.
  • Narrows Lake: The Narrows Lake project is located near Christina Lake and is expected to have three phases of development. The construction work on Phase A of the project, which is estimated to have a gross production capacity of 45,000 bpd, started last year. The Narrows Lake project is currently anticipated to become operational in 2017.

As the FCCL Partnership successfully progresses with the ongoing expansion projects, we expect ConocoPhillips’ bitumen production to grow in the next few years. During the first two quarters of this year, ConocoPhillips derived almost 90% of its total bitumen production of around 126,000 bpd from the FCCL Partnership in Canada. We expect the company’s total bitumen production from FCCL to reach more than 350,000 bpd by 2019. [3]

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Notes:
  1. Cenovus Energy Says Foster Creek Oil Sands Expansion Complete, reuters.com []
  2. ConocoPhillips 2013 10-K SEC Filing, sec.gov []
  3. Second-Quarter 2014 Detailed Supplemental Information, conocophillips.com []