US major ConocoPhillips is to exercise its pre-emption right to acquire TotalEnergies’ 50% stake in its operated Surmont oil sands project in Canada, effectively scuppering Suncor Energy’s acquisition of proposed spin-off company TotalEnergies EP Canada (TEPCA).

ConocoPhillips announced it would be purchasing for C$4.03 billion (approximately US$3 billion), plus contingent payments of up to $325 million, TotalEnergies’ interest in the project, taking its equity to 100%.

“Long-life, low sustaining capital assets like Surmont play an important role in our deep, durable and diverse low cost of supply portfolio. Upon close, we look forward to leveraging our position as 100% owner and operator of Surmont to further optimise the asset while progressing toward our overall interim and long-term emissions intensity objectives,” said ConocoPhillips’ chief executive, Ryan Lance.

In line with its low-carbon strategy, TotalEnergies last September announced its intention to exit Canadian oil sands by spinning off TEPCA in 2023. However, the parent subsequently received several unsolicited offers among including a proposal from Suncor to buy all the shares of TEPCA.

Surmont is located in the Athabasca region of northeastern Alberta, approximately 35 miles south of Fort McMurray. A small steam assisted gravity-drainage (SAGD) pilot project kicked off in 1997 and commercial production at Surmont 1 started a decade later.

Construction of Surmont 2 began in 2010 and achieved first production five years down the line and gross output from the oil sands project reached 138,000 barrels of oil equivalent per day in 2021. ConocoPhillips that same year signed a long-term commercial contract to process Surmont’s blended bitumen at a Diluent Recovery Unit (DRU) in Alberta, unlocking additional value for the asset.

Since 2016, Surmont’s greenhouse emissions intensity has declined by about 20%, and ConocoPhillips has plans for future emissions reduction by applying both current and new technology. The US company is also a member of the Pathways Alliance, working to advance carbon capture and storage in Alberta.

ConocoPhillips’ planned acquisition is subject to regulatory approvals and other customary closing conditions. The transaction is expected to close in the second half of this year, with an effective date of 1 April 2023, and will be funded from either cash, short and medium-term financing, or a combination of both.

“[This] announcement reflects our ongoing commitment to enhance our returns-focused value proposition, improving our ROCE, lowering our free cash flow breakeven and further supporting our $11 billion planned return of capital in 2023,” added Lance.

“We will remain on track to achieve our previously announced accelerated GHG intensity reduction target of 50-60% by 2030, using a 2016 baseline.”

The transaction is subject to contingent payments for a five-year term of up to approximately $325 million representing $2 million for every dollar that the Western Canadian Select (WCS) price exceed $52 per barrel during the month, subject to certain production targets being achieved.

Based on a price of $60 per barrel of Western Texas Intermediate, the transaction will add approximately $600 million of annual free cash flow in 2024, inclusive of approximately $100 million of annual capex for maintenance and pad development costs.

“As ConocoPhillips has exercised its pre-emption right, TotalEnergies will be open to complete a transaction with Suncor regarding the sale of TEPCA’s shares, comprising the Fort Hills working interest, as per the agreed value in the initial SPA (sales and purchase agreement),” said the French energy giant.

TotalEnergies has a 31.23% working interest in the Fort Hills oil sands project, located 90 kilometres North of Fort McMurray.