October 29, 2012

Oilsands giant swallows remaining assets of smaller Alberta company

RICHARD GILBERT

staff writer

Cenovus Energy Inc. is buying the remaining assets of Oilsands Quest for a few million dollars, which are located adjacent to the proposed Telephone Lake oilsands project in northern Alberta.

“We are pleased to acquire these assets at such a reasonable price,” said John Brannan, Cenovus Energy Inc.’s executive vice-president and chief operating officer.

“This is a good bolt-on acquisition that has the potential to add value to one of Cenovus’s next big emerging oilsands projects.”

Earlier this month, Alberta Court of Queen’s Bench approved a deal by Cenovus to purchase the remaining assets of Oilsands Quest Inc. (OQI) for $10 million.

The agreement was set up by a court-appointed monitor, Ernst and Young Inc., on behalf of OQI and its subsidiaries as vendors and with Cenovus as purchaser.

Ernst and Young counsel noted that the purchase price is substantially less than the $167 million value estimated by OQI for its assets at the time the Companies’ Creditors Arrangement Act (CCAA) proceedings began in November 2011.

Despite this fact, Ernst and Young and TD Securities Inc., OQI’s financial advisor, are satisfied the deal is the best available recovery for OQI’s remaining assets.

The acquisition includes three oilsands leases, which are adjacent to Cenovus’s Telephone Lake property and cover about 59,000 hectares in Alberta and Saskatchewan.

Cenovus submitted a joint regulatory application and environmental impact assessment in December 2011 for the construction of a bitumen recovery project at Telephone Lake, which is located about 90 km northeast of Fort McMurray.

The project will use steam assisted gravity drainage (SAGD) and have an initial oil production capacity of 90,000 barrels per day (bbl/d), in two phases (Phase A and Phase B), with an estimated operational life of 40 years. This application requests approval for both Phase A and Phase B.

The project is expected to involve the construction of a central processing facility, which consists of: oil treating facilities; steam production facilities; water treatment facilities; sulphur removal facilities and dewatering facilities.

Telephone Lake will also require additional infrastructure, including electrical power lines, an all-weather access road, a fuel gas pipeline, a diluent supply pipeline, and a produced sales oil pipeline.

Cenovus expects Telephone Lake to become a cornerstone project similar to Foster Creek or Christina Lake, which are the company’s two producing oilsands assets.

Total capital expenditures expected up to and including start-up of Phase B of the project amount to almost $3 billion in 2011 dollars. More than two million man hours will be required for construction of the central processing facility and off-site facilities, and for drilling and completion of the initial wells.

About 104 well pads would be required over the proposed project’s expected 40-year operation, including 961 SAGD well pairs and 378 dewatering wells.

The acquisition also includes a 34,000 hectare oil shale lease in east-central Saskatchewan, as well as various surface assets, such as a work camp and assorted vehicles and equipment. It does not include any of Oilsands Quest’s corporate assets or shares.

Before entering creditor protection, OQI was an early-stage oilsands exploration company.

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