1 Billion Acquisition Gives Total a Bigger Stake in the Canadian Oil Sands

1 Billion Acquisition Gives Total a Bigger Stake in the Canadian Oil Sands

After a year and a half of negotiations, French oil leader, Total, has purchased Canadian oil sands company UTS Energy. The acquisition carried a $1 billion price tag, double that of the initial bid made early in 2009. The takeover is a sign that Total has confidence that oil prices with recover in the future, making the oil sands region an important reserve to have hold of in the future.

The land that has changed hands represents a 20% interest in the Fort Hills oil sands project. Operations in this region utilize open-pit mining of bitumen, and the early phase of the project is estimated to produce 160,000 barrels per day (bpd). The operating costs of the mines and refineries are hefty, which leaves the project on hold until oil prices recover.

The buyout leaves Total in a position to get 680 million barrels of bitumen from the project at a cost of $0.62 per barrel. Given the $10 billion capital investment and the refinery costs, this leaves the production cost for a single barrel of oil around $50.

Total is no stranger to the Canadian oil sands. In fact, they already hold a 75% share in the Joslyn mine (200,000 bpd) and a 50% share in the Surmont project where steam injection is used to melt the bitumen from the ground rather than mining it (110,000 bpd potential). Executives at Total released a statement expressing their belief that the oil supply available globally will soon peak at 95 million bpd, and the high demand will make the oil sands projects incredibly profitable.

Those who won't directly profit from the oil industry boom do not look as favorably upon the various oil sands projects. Environmentalists worry about the impact of the strip mining on the Canadian forests, as well as the excessive water usage required to refine bitumen into a form that can be transported easily through the already-established pipelines.

In light of the BP oil spill, politicians and environmentalists have been joining forces recently to fight the TransCanada Keystone XL pipeline initiative. The $7 billion project would carry 1.1 million bpd of crude tar into the Gulf Coast refinery. There is some pressure on Secretary of State, Hillary Clinton, to block the permits necessary for the international pipeline.

Should the U.S. turn down this opportunity to partner with local oil initiatives? As supply and demand begin to rebalance the oil industry, we may find the pipeline to be incredibly valuable. Not to discredit the environmentalists, but Canada is not about to abort the oil sands mining, and if we won't buy the crude product, Total will have no problem finding someone else who will.

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