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(Corrects Sunrise price tag in 14th paragraph to C$3.2 billionfrom C$2.5 billion)
By Nia Williams and Euan Rocha
CALGARY, Alberta, Feb 9 (Reuters) - Faced with record lowprices for heavy crude, Canadian energy companies aresacrificing other parts of their business to keep higher-costoil sands production going and safeguard the billions alreadyinvested in these multi-decade projects.
Companies including Husky Energy Inc, MEG EnergyCorp and Pengrowth Energy Corp are sellingassets or slowing light and conventional oil exploration andproduction, even as they forge ahead with oil sands projectsthat are in many cases bleeding money on every barrel.
Although the move to support higher-cost production seemscounterintuitive, oil sands companies take a longer-term viewthat shutting plants in Alberta would be very expensive and riskpermanently damaging carefully-engineered reservoirs,underground deposits of millions of barrels of tarry bitumen.
It is easier, and cheaper, to shut down and later restartconventional wells.
Producers are also betting that oil prices will eventuallyrecover. The latest Reuters poll of oil analysts forecasts theU.S. benchmark will average $41 a barrel in 2016, a levelwhere most Canadian oil sands projects can break even.
Bankers say the need to bolster balance sheets and cover oilsands losses will boost the number of Canadian energy deals thisyear, particularly sales of pipelines, and storage andprocessing facilities.
"The market was down significantly last year in terms ofenergy M&A, and we think that's going to reverse," said GrantKernaghan, Canadian Investment Banking head for Citigroup.
CORE BUSINESS
MEG is selling its 50 percent stake in the Access pipeline,which analysts value at around C$1.5 billion ($1.08 billion),while Husky is selling a package including 55,000 barrels of oilequivalent per day of oil and natural gas production, royaltiesand midstream facilities, valued at between C$2.4 billion toC$3.2 billion.
According to a recent TD Securities report, virtually no oilsands projects can cover overall costs, including production,transportation, royalties, and sustaining capital, with U.S.benchmark crude below $30 a barrel.
The benchmark heavy Canadian blend, Western Canada Select(WCS), now trades around $16.30 a barrel, just a few dollarsabove record lows hit in January.
But as nearly 80 percent of oil sands costs are fixedinvestments, such as equipment for injecting high-pressure steamunderground to liquefy tarry bitumen, producers prefer to havesome revenue coming in to help offset those costs than none,said FirstEnergy Capital analyst Mike Dunn.
To be sure, if WCS prices dropped even further to below $12a barrel, Dunn said producers may look at ways to trimproduction by 10-30 percent.
Oil sands "remains our core business so we will look tovarious other handles we have to support that business," saidBrad Bellows, a spokesman for MEG.
Even as it makes major cuts, Husky is ramping up new thermalprojects, including its Sunrise joint venture with BP.Sunrise in northern Alberta took three years and C$3.2 billionto build and Husky is in the midst of the two-year process ofraising reservoir pressure to full production capacity. Oncethere, Sunrise is expected to produce for 40 years.
As well as selling assets, some players, such as CanadianNatural Resources Ltd and Baytex Energy areshutting in uneconomic conventional heavy oil wells, but leavingtheir oil sands operations intact.
JEWELS IN THE CROWN
Bankers say that midstream assets - pipelines, storage andprocessing facilities - prove popular with buyers such aspension funds and private equity firms, which favor investmentswith stable cash flows that are relatively easy to value.
"They're to a certain extent the jewels in the crown. Thesecompanies would not be looking to sell them if they could getaway with not doing it," said Citi's Kernaghan.
Last year, oil sands producer Cenovus Energy sold aportfolio of oil and gas royalty properties to Ontario Teachers'Pension Plan for C$3.3 billion.
Industry veterans note oil sands operations also had to be"cross-subsidized" by healthier parts of the business during thelast prolonged market slump in the 1980s and predicted producerswould push to keep operating until prices recover.($1 = 1.3930 Canadian dollars)
(Reporting by Nia Williams and Euan Rocha; Editing by TomaszJanowski)
