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THE WALL STREET JOURNAL: Shell Canada to Acquire BlackRock Ventures For $2.17 Billion

The Wall Street Journal

May 8, 2006 5:34 p.m. EDT

Shell Canada to Acquire
BlackRock Ventures
For $2.17 Billion

May 8, 2006 5:34 p.m.

Shell Canada Ltd. agreed to acquire BlackRock Ventures Inc. for 2.4 billion Canadian dollars (US$2.17 billion) in a deal that boosts its long-term potential for oil production from Canada's big oil-sands resource.

The acquisition comes as Shell Canada, parent Royal Dutch Shell PLC and other Western oil companies have been under pressure to add to their stockpile of oil and natural gas.

BlackRock, based in Calgary, Alberta, is a small oil company producing bitumen — a type of low-quality sticky crude oil — from oil-sands deposits in the Peace River and Cold Lake regions of Alberta.

While Canadian oil sands contain oil that is significantly more expensive to extract and process than conventional crude, they are increasingly regarded as a sound bet for big oil companies seeking to improve their long-term production prospects. The deposits could represent a dependable source of oil production for decades to come as long as crude oil prices stay high enough to justify exploiting them. Moreover, their proximity to the U.S. ensures a strong, accessible market for the oil.

Under terms of its offer, Shell Canada will pay C$24 for each BlackRock share, representing a 27% premium over Friday's close on the Toronto Stock Exchange for BlackRock's shares; BlackRock traded at C$23.87, up C$4.99, or 26%, at 4 p.m. EST on Monday.

Shell Canada's announcement followed rumors of an impending takeover bid for BlackRock, which last week sharply drove up the junior oil producer's stock. Also in Toronto, Shell Canada — 78% owned by Royal Dutch Shell of Britain and the Netherlands — was trading at C$40.38, down 62 Canadian cents.

On the basis of proved plus probable oil reserves, Shell Canada's offer represents $11.45 a barrel of oil in the ground. At current prices, that gives Shell Canada room to ensure that production from its prospective new properties is profitable.

The integrated oil company also stands to realize economies of scale by integrating its Carmon River oil sands project in the Peace River area with BlackRock's operations on adjacent leases. Shell Canada President and Chief Executive Clive Mather said that acquiring BlackRock would add 12,000 to 14,000 barrels a day of heavy-oil production and provide Shell Canada with access to “significant additional resources.”

Still, the timing of the offer surprised some analysts, as Alberta's market for oil assets recently has been heated to fever pitch by strong commodity prices and an industry rush to pour tens of billions of dollars of investment into developing the province's oil sands. “The surprise is that they're paying this much now…It's really a deal to buy long-term reserves,” said Wilf Gobert, vice president of Calgary brokerage firm Peters & Co.

Despite the investor pressure on Royal Dutch to add reserves, which has meant that the company has been forced to turn more and more to investment in hard-to-produce unconventional sources of oil and natural gas, the multinational oil producer has shown few signs of increasing its appetite for acquisitions. Its last large corporate acquisition, in 2002, was its $5 billion purchase of U.K. independent oil producer Enterprise Oil PLC.

In Alberta, Shell Canada has announced plans to spend about C$17 billion by 2010, but the lion's share of the spending has been earmarked for expansion of the company's existing oil sands projects.

Still, with all the recent interest in oil sands, Alberta's supply of high-quality oil sands leases has been shrinking. Companies seeking to expand their oil sands resource base recently have had to choose between betting on the long-term profitability of oil production from lower-quality assets and paying high prices for assets held by others.

Last month, Royal Dutch ended months of industry speculation by announcing it was the mystery buyer of a large land-lease in Alberta's main oil sands producing area. Analysts and industry experts note that the heavy-oil resource on that particular lease is locked in a hard carbonate rock formation instead of loosely packed sandstone, and can't be produced profitably with current technology.

Write to Tamsin Carlisle at tamsin.carlisle@wsj.com1 and Benoit Faucon at benoit.faucon@dowjones.com2

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