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The Business Online: The big oil companies target Canadian oil sands operators

The big oil companies target Canadian oil sands operators

By Richard Orange
14 May 2006

STAFF at Calgary’s Fairmont Palliser Hotel are getting used to a resolutely international crowd. After decades on the fringes of the oil industry, the Canadian province of Alberta is hot. And a stream of investment bankers and company executives, from China, Italy, the UK, France and the US, have been traipsing through the lobby of Calgary’s smartest hotel for two years now, looking to strike a deal that will bring their companies a bigger slice of the prize.

Alberta’s vast reserves of oil sands and heavy oil, with more than 174bn barrels, rival Saudi Arabia’s and, thanks to the $70-a-barrel oil price, what was five years ago marginally economic is now highly profitable. So when Royal Dutch Shell last week snapped up Canadian heavy oil company Blackrock Ventures for $2.18bn (E1.68bn, £1.15bn) hopes were raised that the long-awaited oil sands takeover boom may have begun.

Shell certainly paid a full price. The offer was a 27% premium to Black Rock’s share price and more than three times as much per barrel of reserves than Shell’s French rival Total paid when it snapped up Deer Creek Energy for $1.6bn in September 2005.

Granted, Deer Creek’s assets were in oil sands, which have to be expensively scooped out of the earth, using the world’s biggest diggers, after which the oil is washed out. Blackrock Ventures, on the other hand, produces heavy oil from the Peace River bitumen reserves, where Shell already has a big project.

Days before the announcement, Shell had already announced plans to increase production at Peace River from 8,000 barrels per day (bpd) to 100,000 bpd by 2009. The idea is to apply what’s known as a “huff and puff” system, pumping steam into the grounds to help extract the bitumen. Applying the technology to Blackrock’s 12,000 bpd production would add at least an extra 30,000 barrels per day.

Even so, the $3.77 per barrel Shell paid is still more expensive than other oil sands companies of the same scale. According to Canada’s Peters Co, the only one more expensive would be Canadian Oil Sands Trust at $5.6, which, owing to its ring-fenced tax-free financial structure, is out of bounds to major oil companies.

Italy’s Eni, Chinese oil companies Cnooc and Sinopec, and US oil companies are also looking to get into oil sands. So what else could be on the menu? For Shell, the obvious one is Western Oil Sands, which holds 20% of Shell Canada’s massive Athabasca oil sands project, due to increase production from 180,000bpd to 500,000bpd by 2009. With a market value of $5.1bn, Western Oil Sands would be digestible.

The present share price would value the total resource at just $2.70 a barrel, comparing well with the $3.77 Shell paid for Blackrock. But the word in Calgary is that Shell has long been trying to buy the company out. The management, who originally conceived of the Athabasca project, have so far been unwilling to sell.

Other manageable acquisitions are OPTI Canada, with a market value of some $3.7bn. Like Blackrock, it already has production – some 30,000 bpd, and the share price puts the reserves at $1.77 a barrel, about half what Shell paid for Blackrock. But the price reflects some poor results from the pilot phase of its core Long Lake project.

UTS is another mid-sized favourite, with a value of $2.8bn. There’s little doubt its resource is there, but it has been slow to bring it to fruition and isn’t expected to start producing until the end of the decade. The same goes for Synenco, which is worth some $1.2bn, working out at a bargain $1.45 per barrel. There are others at the smaller end, such as Petrobank and Paramount Resources.

But what really gets people talking in Calgary is the prospect of someone going all the way and buying a large Canadian oil company. A company like Encana, worth about $44bn, with its position in oil sands and unconventional natural gas, would work out cheaper per barrel than its smaller peers, analysts say. And, with a broader mix of assets, wouldn’t be as pure a bet on oil sands, which risk becoming unprofitable if the oil price falls below $25, or labour shortages and fuel costs push production costs up. Nexen, worth some $15bn, and Canadian Natural Resources worth $32bn, would be other monster deals. In any case, while the oil price stays where it is today, the Fairmont Palliser will have little trouble selling rooms.

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