'Oil sands?' Bite your tongue

Carrie Tait
Financial Post
Friday, November 13, 2009

First they were tar sands. Then they were oil sands. Now? Enhanced oil projects. At least according to En-Cana Corp. and its oil-sands spinoff, Cenovus Energy Inc.

The pair want to distinguish their oil-sands operations, which employ the underground and more carbon-intensive steam-assisted gravity (SAGD) drainage method, from the more aesthetically offensive open-pit mining efforts that are accompanied by deadly tailings ponds. As a result, the two firms have ditched the term "oil sands" from their lexicon and replaced it with "enhanced oil projects" or just "oil projects."

"What we have done is had a look at the nature of the recovery techniques that we apply on EnCana's bitumen production, which is 100% [steam-assisted gravity drainage], and there are assets and properties that we drill and use drilling techniques to recover the oil, which is really a form of enhanced recovery," Brian Ferguson, EnCana CFO and future Cenovus CEO, said during EnCana's third-quarter conference call.

Cenovus will inherit En-Cana's SADG oil sands operations -- Foster Creek, Christina Lake and Borealis -- not to mention the environmentally unfriendly connotations, government red tape, and public relations headaches that come with doing business in northern Alberta when En-Cana splits in two at the end of the month. The oil sands are the world's second-largest known oil reserves behind Saudi Arabia.

"We just thought it was more representative of the nature of Cenovus' assets to describe them as such so that there wasn't any confusion [between SAGD and mining projects]," Mr. Ferguson said after EnCana and Cenovus unveiled their preliminary 2010 budgets.

Enhanced oil recovery traditionally means energy companies increase pressure in a reservoir by flooding it with water or injecting it with carbon dioxide in order to bring more crude to the surface. In oil sands SAGD or in-situ projects, two horizontal wells are drilled and steam is injected into the reservoir via the top well to melt the sticky, thick bitumen.

Kyle Murray, an associate professor of marketing at the University of Alberta School of Business, understands why EnCana and Cenovus want to distance themselves from the notorious images associated with the oil sands, but thinks they may fail.

"Rebranding works best when it comes with a lot of changes," he said. "Taking the exact same product and giving it a new name and without explaining what the value is or how it has changed isn't likely to be very effective."

Roughly 80% of the oil sands reserves will have to be extracted through SAGD methods because the bitumen is buried too far below the surface to mine.

Oil sands detractors, however, have made Fort McMurray's strip mines and tailing ponds the centrepiece of their intense dirty oil campaign. A cluster of SADG operators has formed the In Situ Oil Sands Alliance to further differentiate their operations from mining projects.

EnCana, which will focus on unconventional natural gas assets after it separates itself from Cenovus, plans to spend between US$3.6-billion and US$3.9-billion in 2010. Cenovus expects to spend between US$2-billion to US$2.3-billion, executives said.

EnCana as a whole earned US$25-million, or US3¢ per share in the quarter, compared with US$3.55-billion, or US$4.73 a share a year ago.

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