After Venezuela, ConocoPhillips May Redouble Canada Efforts

CALGARY (Dow Jones Newswires)

Venezuela's intransigence on its challenging crude-oil projects may send ConocoPhillips' (COP) into the arms of Canada's oil sands.

Venezuela confirmed Tuesday that ConocoPhillips would exit the Orinico river basin, home to ventures that produce low-quality, or heavy, oil, after the Houston-based energy company refused the terms covering a new ownership structure for its projects. ExxonMobil Corp. (XOM) also said it wasn't able to reach agreement with Venezuela.

The ramifications for oil markets may be far-reaching. Venezuela's oil output has been in steady decline, and it's unlikely that the state-owned oil company, newly instated as operator of the Orinoco projects, has the access to technology and project-management prowess to turn the trend around.

Venezuela's move may bode well for Canada's oil sands, a hydrocarbons province similar to the Orinico basin that is also in close proximity to the U.S. Companies may give more weight to Canada's more stable operating environment in light of tightening restrictions in countries such as Venezuela.

ConocoPhillips' decision to pull out of Venezuela is "incrementally positive" for the oil sands and could prompt international energy companies to pay more attention to the Canadian resource, said Adam Zive, an oil and gas analyst at Desjardins Securities.

Given ConocoPhillips' uncertain future in Venezuela, it could shift some capital that was earmarked for the South American country toward Canada and its joint venture with EnCana Corp. (ECA), Canada's largest hydrocarbons producer.

Last October, the two companies said they will spend almost $11 billion over the next decade to boost Canada's oil output and deepen its access to the U.S. market. The companies, via a pair of joint ventures, aim to increase the output of crude oil from two of EnCana's projects in Alberta's oil sands and to expand the capacity of two of ConocoPhillips' U.S. refineries to process the crude.

Many of ConocoPhillips' plants already are set up to process Venezuela's heavy oil, which requires special equipment to remove sulfur and improve quality. With minor adjustments, those plants could be geared to run volumes from Canada.

ConocoPhillips could be more eager now to see its partnership with EnCana succeed in order to offset significant losses from Venezuela, said Randy Ollenberger, an energy analyst at BMO Capital Markets.

ConocoPhillips has some 130,000 barrels a day of crude output in heavy-oil projects in Venezuela, representing 9% of ConocoPhillips' total oil and gas reserves and about 4% of its production. Its shares have been hit by the news of its exit, slipping $2.46 to $75.58. ConocoPhillips's stock has fallen further than that of its peers; energy stocks were under pressure Tuesday due to falling oil futures prices.

The company is already aware of the importance of the oil sands and would continue to look at Canadian opportunities, but it was too soon to tell if it would intensify its efforts outside of the EnCana venture, said Brian Hall, energy analyst at IHS Inc.

"We're not going to see any acquisitions anytime soon," Hall said.

Copyright (c) 2007 Dow Jones & Company, Inc.

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