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Royal Dutch Shell Plc .com: More twists in Arctic gas contest

Oil sands trust sees assets as ‘cheap insurance’ against rising gas prices; Petro-Canada extends offer without sweetening terms; Coutu says Arctic Islands likely need LNG project

By Gary Park
For Petroleum News

The tussle over natural gas assets in Canada’s Arctic Islands won’t hear the final bell for at least another month.

In an unexpected development, Canadian Oil Sands Trust (COST) apparently trumped two earlier bids for Canada Southern Petroleum, but Petro-Canada has kept itself in the mix by extending its unsolicited offer for another two weeks.

COST, which needs gas to fuel its 35.49 percent stake in the Syncrude Canada consortium, described the Canada Southern holdings as “one of the last stranded gas plays in the world” in taking on the white knight role.

It launched an all-cash bid of C$165 million that is scheduled to close July 30 by offering US$9.75 per share for the junior natural gas producer — US$2.25 per share better than Petro-Canada’s proposal and an improvement of about 16 percent on the cash-and-shares bid by Canadian Superior Energy.

Petro-Canada responded by stretching the expiration date on its hostile takeover attempt from June 20 to July 5, but made no effort to fatten its offer.

Higher bid coming?

However, a company spokesman told Petroleum News that Petro-Canada is closely “monitoring and evaluating what is going on and we are keeping all of our options open.”
He would not say whether that could result in a higher bid — something the company has insisted it would not do.

COST has a stake of close to 100,000 barrels per day in the Syncrude operation and has a market value of about C$14 billion.

Straying so far from its Athabasca oil sands base in northeastern Alberta, COST caught many analysts off guard, causing some of them to question the strategy.

Mark Friesen, with FirstEnergy Capital, said there are many other stranded gas prospects in the world that might be easier to develop than the Arctic Islands.

He also noted Coutu told a Calgary conference earlier this year that COST had no plans to look beyond the Athabasca region for potential deals and if it did it would advise investors.

Andrew Fairbanks, with Merrill Lynch, said the Canada Southern acquisition seems like a “complex way to put a long-term price hedge on (COST’s gas purchases) particularly because those are reserves that may or may not be developed within the next 20 years.”

COST chief executive officer Marcel Coutu told a conference call that acquiring Canada Southern is a “unique opportunity to support our oil sands business.

“This acquisition is very compatible with our business model and strategy,” he said, noting that COST is not motivated to get into Arctic gas development.

Development at least 10 years away

However, Coutu agreed that development of the resource is at least 10 years away and would likely require an LNG project to bring the gas on stream.

Canada Southern has estimated its share of working and carried interests in seven significant discovery licenses represents 927 billion cubic feet of marketable gas — a figure that Petro-Canada, as the largest lease holder in the region, has suggested is overstated, but that Coutu said COST believes is “in the right ballpark.”

If the estimate is accurate, Coutu said the gas would meet his trust’s needs at Syncrude Canada for 25 years and could be developed at little or no capital investment by the trust.

Ten cents per thousand cubic feet

He also said that COST plans to sell Canada Southern’s holdings in the southern Yukon and northern British Columbia which produce about 6 million cubic feet per day.
That would put the price tag to acquire the Arctic gas at 10 cents per thousand cubic feet, he said.

“It’s a financial hedge because it could offset our natural gas costs down the road,” he said.

“In essence this is relatively cheap insurance against natural gas price increases and we believe this asset will appreciate if our domestic cost for gas at Syncrude rises.”

The Syncrude consortium is currently working on repairs to its Stage 3 expansion that is designed to boost its output to 350,000 bpd from 260,000 bpd.

Taking such a bold move beyond its core operation, COST has also pointed to the importance of Arctic gas to sustain the oil sands business.

First solid link from Alberta to Arctic

It is the first bitumen producer to directly link the Arctic to northern Alberta, although critics of the Mackenzie Gas Project have argued that the 1.2 billion cubic feet per day of gas from the Mackenzie Delta will likely be consumed for the extraction and processing of bitumen.

However, Mackenzie lead partner Imperial Oil has insisted there is no intention to ship the Mackenzie gas to current and planned oil sands projects operated by the Delta anchor gas owners — Imperial, Shell Canada, ConocoPhillips Canada and ExxonMobil Canada.

Because gas is the single most expensive component in the oil sands sector producers have been scrambling for new supply sources as Western Canada’s reserves dwindle and many are exploring alternative energy sources, including the gasification of bitumen.

But Coutu said gasification is “not a near-term option” for Syncrude because of the technical challenges to be overcome.

 

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