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After almost a decade in operation, Foster Creek is the largest thermal oilsands project using advanced drilling technology to reach payout and begin paying higher royalties to provincial government coffers, Cenovus Energy said Thursday.

In releasing higher first-quarter financial results, Cenovus said cumulative revenue from Foster Creek exceeded deductible costs for royalty purposes in February. As a result of reaching payout, royalties increased to 9.7 per cent from an average of 1.4 per cent in 2009, with only a portion of the quarter reflecting the increased rate.

Although CEO Brian Ferguson said Cenovus would pay even higher royalties in subsequent quarters -- about 17 to 20 per cent depending on oil prices -- he also expressed pride at achieving an accomplishment that validates the company's growth strategy.

"That is a tremendous milestone," he told the Herald. "This milestone reflects the strong economics at Foster Creek."

Cenovus becomes the latest oilsands producer to report higher first-quarter results, after Nexen, Imperial Oil, Husky Energy and Canadian Oil Sands Trust all said higher oil prices helped raise quarterly profits.

Foster Creek uses a drilling technology known as steam assisted gravity drainage, whereby dual horizontal wells simultaneously inject steam and produce bitumen from deposits too deep to mine.

Development of the technology by the Alberta Oil Sands Technology and Research Authority in the 1980s is widely credited with unlocking the largest oil reserves after Saudi Arabia.

Foster Creek is on land granted by the Alberta government to the former Alberta Energy Co. in 1978.

Work at Foster Creek began in 1996 when Cenovus was still part of Alberta Energy and began producing its first barrel of oil in 2001 when the company merged with PanCanadian Petroleum to form the original Encana.

Today, 160 wells are producing more than 102,000 barrels per day as part of an integrated refining and production joint venture with ConocoPhillips.

Alberta Energy department spokesman Tim Markle said Cenovus's graduation to higher-tier royalties speaks to the success of efforts by government and industry to develop and commercialize oilsands technologies.

"It proves the technology itself is competitive and viable and Cenovus has proved that," he said.

Also Thursday, Cenovus reported higher first-quarter profits in its first full quarter since it was spun off last year by Encana Corp. As a pure play oilsands producer, it earned $525 million, or 70 cents a share, up from the $515 million, or 69 cents a share, it would have made as part of Encana.

Oilsands production before royalties rose 66 per cent during the quarter to 58,546 barrels a day, while natural gas output fell 11 per cent to 775 million cubic feet a day.

Cenovus will provide further details on development plans in June, when it's expected to announce at least one future project. It will also file an application for its Narrows Lake project this summer.

Cenovus is expecting regulatory approval for an additional 45,000 barrels per day at Christina Lake later this year and approval for 60,000 bpd at Foster Creek in 2011.

"We continue to explore other opportunities to accelerate additional phases," Ferguson said.

The company has created a third project development team and will hire a 180 people at Christina Lake this year in preparation for expansion. Cenovus officials also noted Thursday costs are starting to rise, in particular in Saskatchewan's busy light oil plays such as the Bakken, where costs are up about 10 per cent.

Kam Sandhar, an analyst with Calgary-based Peters and Co. Ltd., maintained a "sector outperform" rating on the company's shares and increased his target price to $36 per share. On Thursday, Cenovus's shares jumped $1.30, or almost five per cent, on the Toronto Stock Exchange to $29.89.

"Based on the company's demonstrated history of project execution in oilsands expansions, and its stable and predictable natural gas production base, Cenovus remains one of our top picks."

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