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Bloomberg: Shell Offers to Buy Out Canada Unit for C$7.7 Billion (Update9)

By Mathew Carr and Sonja Franklin

Oct. 23 (Bloomberg) — Royal Dutch Shell Plc, the second- biggest European oil company, offered C$7.7 billion ($6.8 billion) to buy out its Canadian unit and gain greater production from the oil sands.

Shell, which owns 78 percent of Shell Canada Ltd., offered C$40 a share for the rest, according to a statement today from the Hague-based company. That’s 22 percent more than the closing price of the unit’s stock at the end of last week. The shares climbed 29 percent, topping the offer price.

Chief Executive Officer Jeroen van der Veer needs access to new sources of oil and gas after Shell said in 2004 that it overstated reserves. As much as C$125 billion may be spent in the next decade to almost triple output from Canada’s oil sands, according to the National Energy Board. Reserves there may be second only to Saudi Arabia.

“I would never trade the shares” at the C$40 offer price, said Michael Smedley, who manages about C$800 million at Canadian General Investments Ltd. in Toronto. His firm holds 260,000 Shell Canada shares. “Clearly it’s an extremely valuable property, and we will wait to see if more is likely to be paid.”

Shell said the buyout of the Canadian unit, the nation’s fourth-largest oil company, would simplify its corporate structure, continuing an effort begun after the reserves scandal.

Large oil companies no longer need a separate, publicly traded unit to operate in Canada, said Adam Waterous, president of the oil advisory unit of Canada’s Bank of Nova Scotia. “They were obviously created under a very different political environment and today, in our view, would definitely not be created,” Waterous said in an Oct. 17 interview in Calgary.

Athabasca Oilsands

Shell Canada’s oil-sands project is in the Athabasca region in northeastern Alberta, where oil-laden earth is strip mined and then processed with heat and solvents to extract the tar-like crude. The project has the capacity to produce 155,000 barrels a day, and a 100,000 barrel-a-day expansion is planned.

Labor and equipment costs for oil-sands projects are surging as companies vie to expand and take advantage of higher oil prices. Shell’s expansion may cost as much C$12.8 billion, the company said in July, up from an earlier estimate of C$7.3 billion in August 2005 and an original estimate of C$4 billion.

Shell Canada Chief Executive Officer Clive Mather expects final approval this week from Chevron Corp. and Western Oil Sands Inc., his partners in the Athabasca project, to proceed with the expansion. Mather said last week that his oil-sands projects would remain viable should crude prices fall to $30 a barrel.

Shares Gain

EnCana Corp., the largest holder of properties in Canada’s oil sands, earlier this month said it will form a joint venture with ConocoPhillips that will spend more than $10 billion to expand output from the deposits eightfold. Last year, Total SA of France agreed to buy Deer Creek Energy Ltd., a Canadian oil-sands producer, for C$1.7 billion.

Shell Canada acquired BlackRock Ventures Inc. in July for C$2.43 billion to gain more properties in Alberta’s oil sands.

Oil prices have tripled in the last five years, boosting the appeal of projects such as oil sands. Oil today traded at $58.45 a barrel on the New York Mercantile Exchange, down 25 percent since a July record.

`Not Good Enough’

Shell Canada shares jumped C$9.44 to C$42.24 at 1:30 p.m. on the Toronto Stock Exchange. Before today, they had fallen 22 percent this year. They touched a 16-month low in early October. Shell A shares in London lost 6 pence to 1,760 pence.

“The offer’s not good enough,” said Len Racioppo, president of Montreal-based money management firm Jarislowsky Fraser Ltd., which has about 29.5 million Shell Canada shares among the $54 billion in assets it manages. “The Royal Dutch people are being opportunistic. They’re bidding at a time when the price is near a low.”

Shell’s offer for Shell Canada will likely succeed because “there is only one purchaser in town,” said Alan Beaney, who helps manage the equivalent of $1.7 billion, at Principal Asset Management in Sevenoaks, England.

Cost Overruns

Shell’s announcement in January 2004 that it inflated its reserves tarnished the company’s reputation with investors and led to the ouster of then-Chairman Philip Watts. The company overstated 2002 reserves by 41 percent.

Cost overruns have marred the projects that are needed to replenish its reserves and boost production, including Russia’s Sakhalin 2 venture. Shell last year said costs for the second phase of the venture doubled to $20 billion, prompting a review by the government of President Vladimir Putin and threats to cancel construction permits.

Shell in July said it will make fuels from Qatari natural gas in a project that may cost as much as $18 billion, triple earlier estimates. Shell is the second-biggest oil company in Europe after BP Plc, based on market capitalization. The world’s biggest oil company is Exxon Mobil Corp.

Canada’s oil sands contain an estimated 175 billion barrels of recoverable oil, second only to Saudi Arabia’s 259 billion barrels, according to the Canadian Association of Petroleum Producers.

`Simplifying Structure’

The buyout proposal “is a further step in simplifying the group structure” after the company merged its Dutch and U.K. boards last year, Shell said today. Owning 100 percent of Shell Canada will give it “full access to the group’s financing capabilities,” the statement said.

Mather said in an interview last week that Shell Canada’s status as a standalone company with an independent board gave him “flexibility, maneuverability.” He said that being separate from Shell’s group structure made it easier for him to “get this place fired up and working hard around very sharp, clear goals.”

Shell said in the statement that it wants support from Shell Canada’s board, which will make its own valuation of the holding. “The group reserves the right, however, not to proceed with the making of an offer if it is unable to obtain this support.”

He declined today, through spokeswoman Jan Rowley, to comment on the buyout offer.

To contact the reporter on this story: Mathew Carr in London at [email protected] ; Sonja Franklin in Calgary at [email protected]

Last Updated: October 23, 2006 13:55 EDT

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