Alberta's oil sands Next For Ivanhoe Energy

Friedland changes tack with oil sands entrance

NORVAL SCOTT
Thursday, May 29, 2008

CALGARY — The title of “Canada's nickel prince” wasn't enough for Robert Friedland. Now, he's looking to be an oil baron.

Mr. Friedland rose to prominence when his former firm, Diamond Fields Resources, made a huge discovery of nickel at Voisey's Bay in Newfoundland in 1993.
Diamond Fields was ultimately sold to Inco Ltd. for $4.3-billion, a sale that gave Mr. Friedland legendary status among Canada's miners and helped make him a billionaire.

Now, Mr. Friedland, a successful promoter of long-shot mining projects with a knack for attracting investors to remote regions or complex plays, is looking to make a new underground fortune in Alberta's oil sands, the tarry mix of sand and silt that holds huge reserves of crude.
The bituminous nature and deep location of those resources means the oil is hugely expensive and difficult to extract, placing the region off limits to all but the world's largest energy companies.

Ivanhoe Energy Inc., the Calgary-based company of which Mr. Friedland is chief executive, believes it has a solution that has escaped others.

It has developed an upgrading technology that it says improves the quality of the bitumen on site instead of at dedicated plants, dramatically reducing the cost of both producing and transporting oil sands crude and making it more economically feasible for smaller players to get involved.

Now, Ivanhoe plans to put its technology to the test. The junior company, which has a market capitalization of around $650-million, said Thursday that it will buy three oil sands leases from Talisman Energy Inc. for a total of $105-million, including only $30-million in cash up front. Talisman, which has long shunned any opportunity to become an oil sands player and has had the leases on the market for two years, has the option to buy back into the leases as a minority partner.

On one of the leases, Ivanhoe will build a small, technically advanced project – producing between 30,000 and 50,000 barrels a day – that will upgrade crude more cheaply and use far less natural gas or diluent than other projects, the company said. The project is expected to cost somewhere between $1-billion and $2-billion, depending on its size.

“We couldn't be more thrilled. [This deal means] we're in charge of our own destiny,” said Ian Barnett, Ivanhoe executive vice-president of finance. “We can now [build a project] on a much, much smaller scale.”

The oil sands, putting Canada on the map for both their ambitious scale and the controversy surrounding their environmental impact, seem a good fit for Mr. Friedland.
A larger-than-life figure, his big ambitions have attracted a healthy dose of controversy. He once fought a four-year legal battle with U.S. governments over pollution at a Colorado mine site before reaching a settlement in which he did not acknowledge any personal liability and the governments acknowledged no one was solely responsible for the environmental problems.

Mr. Friedland has proved many critics wrong. A copper and gold project in Mongolia looked like an uphill battle until Rio Tinto agreed to buy a 9.95-per-cent stake in the company developing the mine, Ivanhoe Mines Ltd., for $345-million in 2006. Rio Tinto has the option to raise its stake in the project to 47 per cent by investing $2.3-billion (U.S.) in the Friedland company.

Ivanhoe's heavy-oil technology, dubbed HTL, runs bitumen over a circulating bed of very hot sand, upgrading its quality by burning off the heaviest, least useful part of the barrel, leaving lighter crude in its place.

That's a potential step change in the oil sands, where that processing usually takes place in upgraders that cost billions to build. Downscaling that process to smaller projects, without vast expense, fills a gap in the market, said Chris Feltin of Tristone Capital.

“These projects aren't big enough on their own to justify their own upgrader, so this fits a niche opportunity and has big cost advantages,” he said, estimating HTL crude could cost $15 less per barrel to produce than oil extracted with steam-assisted methods.

Beyond Ivanhoe Energy and the oil sands, Mr. Friedland also runs Ivanhoe Mines, a $3.4-billion Toronto Stock Exchange-listed company. He was travelling Thursday and wasn't available for comment.

As befits Mr. Friedland's reputation as a player with a global eye, Ivanhoe Energy has also recently created subsidiaries targeting HTL opportunities in Latin America, China, the Middle East and North Africa as it tries to lever its technology into opportunities in those regions.
Those subsidiaries, which will aim to be self financing, will concentrate on seeking agreements with state-owned companies, said Ed Veith, Ivanhoe executive vice-president of upstream.
With files from reporter David Ebner in Calgary