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Cenovus gets price boost with direct sale to China

Oil storage tanks at Cenovus Pelican Lake project

Rene Michaud - Bliss Photographic/Cenovus handout

Cenovus Energy Inc. sold its first drops of oil directly to China last week, fetching a higher price for its crude than if it sold its bounty in North America, and now plans to strike more export deals with Asian buyers.

The oil sands company sold 250,000 barrels of heavy oil from its Pelican Lake operation to an undisclosed Chinese customer, Rhona DelFrari, a Cenovus spokesperson, said Wednesday. While this is the first time Cenovus shipped its oil directly to a Chinese buyer, the company's crude has reached this overseas market before thanks to intermediaries, she said.

Cenovus struck firm shipping contracts on Kinder Morgan Inc.'s Trans Mountain pipeline, which reaches the B.C. coast, on Feb. 1. Now that it has guaranteed space on the line, the company plans to pursue more Chinese agreements, she said.

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"We got a substantial premium" for the oil shipped to China, Ms. DelFrari said. She would not pinpoint the price, but said it was close to the price for Brent oil, an international benchmark that has traded at a significant premium to the North American standard.

Asia is an important market for oil companies operating in Canada because of its growing demand coupled with worries about Canada being reliant solely on the United States for export. This tension increased after the Obama administration iced TransCanada Corp.'s proposed Keystone XL pipeline. Enbridge Inc.'s Northern Gateway to the West Coast has widespread support from Ottawa, but faces stiff opposition from environmentalists and first nations. Kinder Morgan wants to expand the Trans Mountain system.

Meanwhile, Cenovus confirmed Asian companies are interested in partnering with the company on its Telephone Lake oil sands project.

"In recent weeks, we have seen some significant new international interest from some parties that were relatively late to enter the [Telephone Lake]process," Brian Ferguson, Cenovus chief executive officer, said Wednesday on the company's fourth-quarter conference call. "That's what's caused us to say we are extending."

Mr. Ferguson joined Prime Minister Stephen Harper's trade mission to China last week, and said in an interview that he met privately with China's state-owned energy firms, which have poured billions of dollars into the oil sands in recent years.

Cenovus said it made $266-million or 35 cents a share in the fourth quarter, up from $78-million or 10 cents a year earlier. Its oil sands production climbed 22 per cent as the company churned out an average of 74,576 barrels of oil a day in the quarter. Further, the company jacked up its dividend by 10 per cent, and hinted it wants to make further increases.

The Calgary-based company, which was spun out of Encana Corp., said its proved bitumen reserve increased 26 per cent from 2010.

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But however successful at exploring for and extracting bitumen, the company is not immune to a crucial problem weighing on oil sands companies: rising costs.

"Overall oil sands operating costs increased 18 per cent [year over year]and 4 per cent sequentially," Andrew Potter, an analyst at CIBC World Markets Inc., said in a research report. While costs at Cenovus's Christina Lake project dropped as the project ramped up, costs at its Foster Creek and Pelican Lake efforts climbed, he noted.

But at the same time, Cenovus "is one of the few [energy companies]that is doing a really, really good job," he said in an interview.

The market is concerned about how smoothly energy companies are able to operate their projects. Canadian Natural Resources Ltd., for example, shut down its Horizon oil sands facility because of problems at an upgrader earlier this month. Nexen Inc. has struggled for years with its Long Lake oil sands project. But Cenovus, Mr. Potter said, has been steady. "Take your pick of names. Every one of them has had a lot of issues. Cenovus is the one that keeps on trucking along."

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About the Author

Carrie Tait joined the Globe in January, 2011, mainly reporting on energy from the Calgary bureau. Previously, she spent six years working for the National Post in both Calgary and Toronto. She has a master’s degree in journalism from the University of Western Ontario and a bachelor’s degree in political studies from the University of Saskatchewan. More

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