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Koch Brothers Cashing in 220,000 Acres of Tar Sands Holdings

(Photo: Matt Leonard / Flickr)

Recent action by Koch Oil Sands pulls the curtain back further on the Koch family’s deep but quiet involvement in Canada’s oil sands industry.

A Canadian division of Koch Industries is reviewing a range of offers to buy up to 220,000 net acres of its many undeveloped oil sands properties within Alberta’s vast reserves of oil sands.

The company, Calgary-based Koch Oil Sands Operating ULC, said in June it was looking for strategic investors to help accelerate production on six properties held by the limited partnership Koch Exploration Canada. The company later said it would entertain offers to acquire the entire Koch Exploration partnership or to buy any of the projects.

The Koch projects will extract bitumen using a non-mining technique called steam-assisted gravity drainage (SAGD), and are in various stages of development. The projects could ultimately yield an estimated 2.9 billion barrels of “recoverable” resources and could position the buyer “to be a top tier Canadian bitumen producer,” according to an online description of the offering.

The move by Koch to sell off one of its partnerships pulls the curtain back further on the Koch family’s deep but quiet involvement in Canada’s tar sands industry. Koch Industries has had a stake going back 50 years in Canadian heavy oil through mining, pipeline development and refining. Its Pine Bend Refinery in Minnesota is now responsible for about 20 percent of the oil sands crude being piped into the United States and has played a key role in the growth of the family’s fortune. The family stands to profit further from growing U.S. reliance on tar sands imports.

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The potential sale of Koch Exploration Canada comes amid a wave of deals involving oil properties and projects in Western Canada, home to the world’s third-largest proven reserves of crude oil. The investment surge has sent billions of dollars to Alberta’s oil patch and is expected to fuel a doubling of oil production by 2020. It is being led by companies from China—though last month Kuwait’s state-owned petroleum company announced a $4 billion joint venture it hopes to close in October.

“A number of companies are testing the water in acquisitions right now, just because they’re seeing some pretty significant premiums being paid by a good number of foreign national oil companies who are willing to pay top dollar [for a stake in the oil sands],” said Scott Sharabura, a principal and expert on the Canadian oil and gas sectors at Booz & Co., a consulting firm. “In that respect, it can be a good time to be a seller.”

The Koch offering is not among the largest batch of properties recently put up for sale, Sharabura said. But he added, “It’s a significant opportunity … industry participants are going to be interested in how it turns out.”

Because Koch Industries is a privately held company and its holdings are generally not publicly disclosed, it’s unclear how big the Koch Exploration Canada sale is in relation to the company’s total oil sands lease holdings.

Oil sands developments are being closely watched by industry analysts and U.S. environmental groups because of their relevance to debates over America’s energy future. The United States imports most of the 1.6 million barrels per day of tar sands crude produced in Alberta. The Obama administration faces an important decision about whether to deepen dependence on the controversial oil resource by approving a new import pipeline. The proposed Keystone XL, which can’t proceed without the administration’s approval, would carry up to 825,000 barrels a day of dilbit, or diluted bitumen, across the United States to oil refineries in Texas.

The oil sands activities of Koch Industries affiliates have been of particular interest in some circles because the Wichita-based parent company is owned by billionaire brothers Charles and David Koch.

The duo has funded efforts to protect their oil-related holdings, including supporting organizations that work to discredit climate science, undermine support for clean energy and weaken environmental regulations. The Koch brothers are also playing a large role in the current presidential and congressional election campaigns. They have been at the forefront of raising as much as $400 million from private interests to defeat Barack Obama and back mostly conservative causes and candidates.

In June, Koch Oil Sands Operating offered up ownership stakes in six undeveloped oil sands properties that encompass 220,000 net acres of oil leases and hold an estimated 8 billion net barrels of bitumen, the hydrocarbon resin that’s extracted from oil sands and then upgraded to usable crude oil.

Sue Kuethe, a vice president at Koch Oil Sands Operating, referred questions about the offering to Koch Industries in Wichita. Officials there did not respond to requests for comment on the oil sands properties.

Combined, the properties could produce an estimated 345,000 barrels of bitumen per day, according to an overview of the offering released by financial advisor Western Divestments Inc. of Calgary. Canadian oil sands projects with potential production of 3 million barrels per day are either under construction or have regulatory approvals to proceed, according to a September report from The Oil Sands Developers Group.

The value of oil sands properties is difficult to predict without a detailed analysis of a host of variables. However, FirstEnergy Capital Corp. analyst Michael Dunn told Reuters in June that the underlying Koch projects could be worth anywhere from $890 million to more than $2.9 billion.

When the offering was made public, Koch said it was seeking strategic investors who would become part owners and help finance each project’s development. The company subsequently decided to sell the entire package of properties outright, but left open the option of accepting bids on individual projects, according to Moya Little, president of Western Divestments, which advised Koch companies on several previous property sales.

Little wouldn’t disclose how many bids were submitted or identify the bidders, but she noted that in similar offerings, most potential purchasers are large companies already active in oil sands production projects. Bids for the Koch properties were due in mid-August, and the company originally hoped to close the resulting deals this month. “We’ve had a great response for this,” Little said. “Negotiations are ongoing.”

According to the publicly available overview, the most advanced projects in the Koch offering include:

++ Gemini Oil Sands, a project covering more than 56,500 net acres in the Cold Lake region and offering production potential of 55,000 barrels per day of “high quality bitumen.” Regulators have approved a related 1,200 barrels per day demonstration phase as well as the initial phase of production at 10,000 barrels per day.

++ Muskwa Oil Sands, a project involving 39,000 net acres of leases in the Grand Rapids formation, with production potential of 40,000 barrels per day of bitumen. Koch has submitted an application for an initial phase of 10,000 barrels per day of production.

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