BP to spend heavily in U.S. to handle oil sands crude

CALGARY -- BP PLC is making the largest investment to date in U.S. refining capacity to handle Canadian oil sands output, saying yesterday that it is in the final stages of planning for a $3-billion (U.S.) upgrade of its major Whiting refinery near Chicago.

London-based BP -- the only major international oil company without a stake in the Alberta oil sands -- said the investment would increase the Whiting refinery's capacity to handle heavy crude to 350,000 barrels a day from about 85,000 barrels currently. The work is expected to be complete in 2011.

The announcement stoked further speculation that BP will become a partner of Calgary-based EnCana Corp., which hopes to produce 500,000 barrels of oil sands crude a day by 2015, and is close to deals to help process the output.

"We haven't named who we may or may not be working with," said Alan Boras, an EnCana spokesman. "But we are encouraged that BP is expanding its refining capacity for Canadian heavy oil. It's good news for the Canadian industry."

EnCana had planned to announce a partner or partners by the end of this month -- an effort it internally calls Project Apple -- but now news likely won't emerge until October.

Last week, an EnCana executive said the company was close to a deal with a Chicago-area refiner. A deal would likely include exchanging an interest in a refinery for a stake in oil sands production.

BP wouldn't say where the additional supply for its upgraded Chicago area refinery would come from, other than to say it is in talks to expand deals with current suppliers and has nearly completed agreements with other players.

"We are making excellent progress," BP spokeswoman Hejdi Feick said, adding that the most logical pipeline connection would be Calgary-based Enbridge Inc.'s proposed Alberta Clipper line, which would run from Alberta to Wisconsin before connecting with another link to Chicago.

Additional oil sands processing capacity is important for the industry because projections indicate that production from Alberta's Fort McMurray region could triple to three million barrels a day by 2015, from about one million today.

Raw oil sands output comes in the form of bitumen, a low-value product that needs considerable processing to turn it into a more useful synthetic crude, which can then be turned into gasoline and similar products.

The BP investment is important for domestic producers, said Pierre Alvarez, president of the Canadian Association of Petroleum Producers. "It's an additional outlet for Canadian heavy crude," he said.

The prospect of EnCana refining its oil sands output in the United States has raised some questions in Alberta about shipping away the province's raw materials. Mr. Alvarez noted that while the BP investment is big, it's small compared with the amount of processing capacity planned for Alberta in the next decade, more than two million barrels a day, adding to existing facilities for about 800,000 barrels. "It's a staggering amount," he said.

EnCana, while it appears to be looking outside Canada now, said earlier this month that it would consider building an operation in Alberta eventually to process oil sands crude, reversing a long-held view that such a move was unwise.

A BP-EnCana connection makes sense, said Calgary analyst Chris Theal at Tristone Capital Inc., but the BP announcement doesn't necessarily mean an EnCana deal is a certainty.

"There is a natural fit between EnCana and BP with the infrastructure," he told Canadian Press, adding it's "quite possible" that BP will take an equity stake in EnCana's oil sands properties.