The next generation of oil sands projects – the Long Lake project – has completed the latest stage in its financing. OPTI's C$2.2 billion ($1.47 billion) in funds raised marks the return of start-ups to the syncrude industry. If OPTI and its partner Nexen can make the project's proprietary variation of steam-based technology profitable, and the lenders' debt gets serviced, future sands producers will look to Long Lake as a pioneer.

Long Lake is a joint venture between OPTI and Nexen that was formed in 2001 to develop a 20,000-hectare bituminous oil sands lease located in Alberta, Canada. This property, Lease 27, is located 40km southeast of Fort McMurray. It has the potential to produce 1.8 billion barrels of bitumen over a 35-year life.

Nexen is a Canadian oil and gas producer, and will be financing its share of the Long Lake work on its balance sheet. OPTI, however, was formed by Israeli construction and energy concern Ormat as an outlet for its OrCrude bitumen upgrading technology. Once a majority shareholder, Ormat's share of OPTI, if its management's stake is included, is now less than 10%.

But it is Ormat's technology that lies at the heart of the project, since it is the OrCrude process that is the most innovative element. The bitumen will be recovered from the oil sands on site, rather than mined and then processed elsewhere. Earlier and cruder versions of this process, known as steam-assisted gravity drainage (SAGD) are used extensively in the Athabasca region, by Petrocanada and Encana in particular. But OPTI has the exclusive Canadian licence to the OrCrude upgrading technology, which will generate and recover gas as part of the process of upgrading the bitumen to synthetic crude.

This process would negate the need to buy large amounts of power, and therefore gas, to produce the steam for SAGD technology. Ormat says that the upgrading technology, while patented, is the combination of 70 proven processes. And the project sponsors have constructed a 250,000-barrel demonstration plant that as been operational for two-and-a-half years. But this will be the first large-scale financing of the technology.

OPTI, however, has the backing of an impressive amount of equity. In addition to that pledged by Ormat, it benefits from investments by the private equity arms of two major Canadian banks (which have also placed shares and raised debt). It raised $100 million in placements in 2002 and 2003, and completed a $700 million private placement in March 2004. Finally, it closed a $300 million initial public offering in April, and the shares started trading on 15 April. Ormat's stake now stands at roughly 8.7%, while OPTI's largest shareholder is Franklin Mutual Investments.

An $800 million non-recourse loan rounds out the project's capital requirements, and its lead arrangers and underwriters are Scotia Capital, TD Securities and RBC. The three arranging banks, as placement agents on the share issues, and in some cases investors, are comfortable with the project credit, bolstered by Stone & Webster's positive verdict on the technology.

The loan is structured as a mini-perm, and denominated in Canadian dollars to match project costs. According to George Crookshank, OPTI's CFO, the sponsor will attempt a capital markets refinancing once the project is operational. As it is, the debt will probably not be drawn down until the end of 2005.

The loan has a maturity of 2010, and carries a rate of interest of between 5.5% and 6.5% at launch. This puts the floating rate debt margin at roughly 250-350bp over the 3-month bankers acceptance rate. Crookshank spoke to Project Finance in New York, where he is part of the process of syndicating down the debt. US buyers are expected to be key to the transaction's success.

The financing benefits from Nexen's experience in marketing syncrude, and the end product will be a 39-degree gravity sweet crude, similar in characteristics, and selling at a slight discount, to West Texas Intermediate crude. The primary market for the output will be the Midwestern US.

The project benefits from a wealth of regional infrastructure, concentrated on the Athabasca area. Enbridge has a pipeline going through the lease but, if necessary, the product can be transported by tanker. The byproduct, asphaltenes, will be converted into gas, which will be burnt to create steam and used in the hydrocracker. The first phase of the project will have a capacity of 72,000 barrels per day, using between 60 and 70 SAGD well pairs.

The process should over time lead to lower production costs, although, being a self-contained project, its upfront investment will be higher than an operation that ships its feedstock elsewhere for processing, or sources its power from a third party. But a bond refinancing in dollars should enable it to realise these cost benefits over time. According to published reports, Ormat has already realised a 55% annualised return on its $15 million initial investment.

Licensing the technology elsewhere could bring it even further gains. The sponsors have plans to increase the Long Lake capacity to 140,000 barrels, and the two also have an potential reource south of Long Lake – Jackfish – where Devon Energy also operates. There are a further 17 proposed SAGD operations, and while Ormat's technology could become the industry standard is does not plan to license the technology to other operators.

The oil sands themselves tend to rise and fall in popularity alongside the price of oil. Some put their total reserve at 180 million barrels – Saudi Arabia has 260 billion by comparison – although oil sands production costs are high. Their main advantage is access to the western United States. OPTI will not now be back to market until the project is complete. Ormat, however, with a portfolio of geothermal projects in the US, is mulling a stock listing in New York. It already trades in Tel Aviv.

OPTI Canada Inc

Status: underwritten April 2004, in syndication

Size: C$3.4 billion ($1.47 billion)

Location: Alberta, Canada

Description: Debt backing OPTI's share of 72,000 barrel syncrude project

Project sponsors: OPTI, Nexen

Borrower: OPTI

Debt: C$800 million

Arrangers: TD, RBC, Scotia

Tenor: six years

Pricing: 250-350bp over 3-month BA rate

Market consultant: Purvin & Gertz

Engineer: Stone & Webster

Lawyers to the lenders:

Blake Cassels & Graydon

Lawyers to the sponsor: MacLeod Dixon