CALGARY (CP) -- BP PLC [NYSE:BP], one of the world's largest energy companies, will spend US$3 billion to retrofit its Chicago-area refinery in order to become a primary processor of heavy Canadian oilsands crude.
London-based BP said Wednesday that its Whiting refinery in northwestern Indiana will be reconfigured so that oilsands crude will be around 90% of its feedstock, up from a current 20%.
When construction is completed in 2011, the refinery will be able to process about 350,000 barrels of heavy crude per day.
With no Canadian oilsands production of its own, BP did not say where it would get its supply from.
It brought further speculation around large Canadian energy producer EnCana Corp. [TSX:ECA; NYSE:ECA], which is expected to unveil a partnership agreement with a major U.S. refining company within the next month.
BP's major retrofit at the Whiting refinery increases the diversity of oil that can be refined in the U.S. Midwest, said BP America president Bob Malone.
''It also provides a significant market for Canada's abundant heavy crude oil resources,'' he said in a release.
The Whiting refinery, about 16 kilometres from Gary, Ind., and one of five large U.S. refineries owned by BP, produces about 4.5 billion gallons of transportation fuel such as gasoline and diesel each year. Reconfiguration is expected to increase its fuel production by 15%.
Construction at the refinery is expected to create up to 80 new permanent full-time jobs and 2,500 jobs during the three-year construction phase.
A spokeswoman at BP's Canadian headquarters in Calgary said the company was confident it would get the supply of oilsands crude needed to feed the refinery.
''We have current suppliers today that we are acquiring heavy crude from that's going down to that Whiting refinery,'' said Hejdi Feick.
''We're also very close to finalizing some other agreements,'' she said.
Calgary-based EnCana has been looking for a partner with existing North American refining operations that would enable it to capture higher prices than simply selling bitumen on the market.
EnCana is looking to increase oilsands production more than ten-fold in the next decade to half a million barrels per day.
At an energy conference in Toronto last week, EnCana executive vice-president Mike Graham said it was close to a deal with an unnamed partner, who would likely build an upgrader next to a Chicago-area refinery.
An EnCana spokesman said Wednesday that the Whiting refinery was BP's initiative and that it continues to work on its market integration strategy. The company is now saying it will have an agreement by the time it announces its third-quarter results in late October.
Energy analyst Chris Theal with Tristone Capital in Calgary said Wednesday that BP's Whiting refinery retrofit does not necessarily mean that it will partner with EnCana.
''Ultimately, there is a natural fit between EnCana and BP with the infrastructure,'' said Theal, adding that its ''quite possible'' that BP will take an interest in EnCana's upstream oilsands operations in return.
''The other interpretation is that maybe they had discussions and couldn't agree on where the economic rent should be split and so BP's perspective is a 'we'll go it alone' strategy and then look to capitalize and do an upstream project,'' he said.
Theal said that with oilsands production expected to triple in the next decade to about three million barrels per day - far outpacing current refining capacity - it would not be hard for a company like BP to find sources of supply.
Oilsands crude is a thick substance that has to be upgraded and have its high sulphur content removed before it can be refined into a synthetic crude which resembles a light oil.
Oilsands producers are keen to have refining or downstream capacity since raw bitumen sells on the market at a steep discount to upgraded crude.
Cal Hodge, president of A 2nd Opinion Inc., a consultancy in Houston that specializes in fuel and regulatory issues, said the upgrade will add production at the margins and as a result could have an impact on gasoline prices.
However, Energy Department analyst Joanne Shore said the move wasn't likely to have a significant impact on gasoline prices. The cost of crude oil is a bigger factor in setting the price, she said.
Output from the Whiting refinery accounts for a tiny fraction of the country's consumption. The U.S. refines more than 15 million barrels a day of crude oil and it imports several million barrels a day of refined products.
''It's a good move for the country because it will diversify energy supply,'' Hodge said. ''It will do more for you than planting an ear of corn in Iowa and turning it into ethanol.''
Construction was tentatively scheduled to begin in 2007 and be completed by 2011, pending regulatory approvals.
Following the announcement Wednesday, BP stock fell 20 cents to US$65 on the New York Stock Exchange. In trading on the Toronto Stock Exchange, EnCana stock fell C$1.41 or nearly 3% to $50.59.
(c) The Canadian Press 2006