Devon sees enough oil sands refining capacity

By Jeffrey Jones

NEW YORK (Reuters) - Devon Energy Corp. (DVN.N) is satisfied there's enough available processing capacity for its oil sands-derived crude, so it has no need to seek a corporate transaction with a U.S. refiner, its president said on Thursday.

Devon, the biggest U.S. independent oil explorer, is starting up the first phase of its Jackfish oil sands development in northeastern Alberta, a 35,000 barrel a day project. Last September it applied to build the second stage.

Pipeline firms like Enbridge Inc. (ENB.TO) keep expanding their capacity to take blended heavy crude to the U.S. Midwest and beyond, Devon President John Richels told the Reuters Global Energy Summit.

"And frankly we're seeing a lot of interest in the U.S., and particularly the Midwest, by refiners to provide upgrading capacity as they start to have less and less light sweet conventional crude," Richels said.

In addition, upgrading capacity is set to expand in Canada with several merchant plants planned for Sturgeon and Strathcona counties just outside Edmonton, Alberta, Richels said.

Gooey, high-sulfur crude wrung from Canada's oil sands must be upgraded at such plants into lighter oil before refineries can use it as a feedstock to make gasoline.

Big developers like EnCana Corp. (ECA.TO) and Husky Energy Inc. (HSE.TO) have acquired interests in the U.S. refining sector to secure a market for their future output.

At the Reuters Summit on Tuesday, Petro-Canada (PCA.TO) Chief Executive Ron Brenneman said a U.S. refinery deal was not in the cards for his company because it is converting its own refineries to run more heavy oil.

Richels said Devon's oil sands volumes are relatively small compared with some in the industry -- the second phase of Jackfish will double output by around 2011 -- so the need for proprietary refinery capacity is not as crucial.

Devon has been in talks with some refiners about forging supply contracts, but those would be market-based and involve no exchange of equity, he said.

The first phase of Jackfish is starting up at a cost of about C$550 million ($520 million), C$150 million above the original estimate.

It is one of about $100 billion worth of projects that have been proposed or are under way in the Fort McMurray area of Alberta, the site of an unprecedented rush to develop the unconventional crude.

That activity has stretched the labor supply and driven up the costs of materials like steel, leading to overruns at nearly all projects.

Devon expects its assets around Jackfish will eventually pump out about 100,000 barrels a day.

It is not looking for acquisitions to kick-start a quicker expansion, Richels said.