ConocoPhillips exercises preemption right over Canadian oil sands asset

ConocoPhillips Canada elected to exercise its preemption right to purchase the remaining 50% interest in the Surmont project from TotalEnergies EP Canada Ltd. and become sole owner of the Alberta-region thermal project, the company said in a release May 26.

The deal, which ConocoPhillips said was reached for $4 billion (Can.) (US$3 billion) plus contingent payments up to $440 million (Can.) (US$325 million), comes on the heels of one Suncor Energy struck with TotalEnergies.

In April, Suncor agreed to acquire all shares of TotalEnergies EP Canada Ltd.—holder of the Surmont in situ asset plus 31.23% working interest in the Fort Hills oil sands mining project—for $5.5 billion (Can.) plus additional payment potential up to $600 million (Can.).

That deal, reached after TotalEnergies said it would exit Canadian oil sands, was conditional upon operator ConocoPhillips waiving its preemptive rights on Surmont.

As a result of ConocoPhillips exercising its right, “each of the parties has the right to terminate the agreement,” Suncor said in a separate release, noting it will assess the transaction “in light of this change.” Suncor is operator of the Fort Hills asset with 68.76% interest. No additional plans were detailed as of this writing.

Long-life, low-decline

The asset’s low-decline status was noted by Jefferies analysts at the time of the Suncor-TotalEnergies deal in late April. At the time, the analysts said Surmont accounted for about 4% of ConocoPhillips’ total 2023 production and about 7% of its oil production, and while “Surmont is an attractive low decline asset, [ConocoPhillips] does have deep inventory of low decline assets globally (Alaska, Qatar, APLNG).”

Weeks later, predicting ConocoPhillips would likely field Surmont questions during its first-quarter 2023 earnings call, the analysts said they expected the operator would ultimately exercise its right, “given the accretive nature, strong financial condition, and quality of the asset.”

During that earnings call, Andy O’Brien, senior vice-president of global operations, ConocoPhillips, reiterated the long-life, low-capital-intensity nature of the Surmont asset—which yielded the operator 80,000 boe/d production in second-half 2022—and pointed to a maintenance capital of $20-30 million/year on its 50% interest for the last 4-5 years.

ConocoPhillips is drilling its first new pad on Surmont since 2016. That pad, O’Brien said, “will be in the $40-50 million range…a very low-capital-intensity asset,” ultimately calling Surmont a core asset in the portfolio.

In its May 26 release noting the preemption right decision, ConocoPhillips chairman and chief executive officer Ryan Lance said “long-life, low sustaining capital assets like Surmont play an important role in our deep, durable, and diverse low cost of supply portfolio.”

Going further, as 100% owner and operator, he said, the company will work to “further optimize the asset while progressing toward our overall interim and long-term emissions intensity objectives.” Surmont’s GHG emissions intensity has declined by about 20% since 2016, the company said.