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Globe & Mail (Canada): Whatever happened to oil sands takeovers?

NORVAL SCOTT

CALGARY — For the past year, practically every Calgary-based company with oil sands assets has been the subject of takeover speculation, with foreign companies presumed to be champing at the bit to get a slice of the region’s huge reserves.

Along with apparent interest from super majors, national oil companies from countries such as India and Norway have said they’re pursuing multibillion-dollar projects in the region, adding more grist to the feverish rumour mill.

And yet, there have been no major mergers and acquisitions to speak of in the oil sands. In fact, since France’s Total SA bought Deer Creek Energy Ltd. of Calgary for $1.4-billion in September, 2005, the only significant oil sands deals have involved Calgary-based Shell Canada Ltd., which bought Blackrock Ventures Inc., also of Calgary, in May, 2006, for $2.4-billion, before being snapped up itself by Anglo-Dutch parent company Royal Dutch Shell PLC for $8.7-billion, a deal that’s expected to close this month.

According to industry observers, the low level of activity is because oil sands resources are too expensive, forcing foreign operators to invest elsewhere.

“There’s a huge markup for what people want for their [oil sands] assets,” said Glenn MacNeill, vice-president of investments for Toronto-based Sentry Select Capital Corp. “Some deals proposed to the marketplace haven’t been very well received as they’re far too expensive. There’s been no value in them.”

As a result, expected foreign deals haven’t taken place as one might have expected. In January 2006, India’s national oil companies said they would spend more than $1-billion on oil sands deals, while Norway’s Statoil ASA also said it was chasing a multibillion-dollar oil sands development. Both events have so far failed to materialize.

Similarly, while Chinese national oil firms already have a small foothold in Alberta, an expected huge wave of further investment from them hasn’t been forthcoming. Canadian companies haven’t shown a great deal of interest in supplying crude to China through Enbridge Inc.’s proposed 400,000 barrel-a-day Gateway pipeline, delaying its construction and seemingly dissuading further Chinese investment for the time being.

As well as high valuations, cost pressures within Canada — including a lack of skilled labour and inflated material costs — appear to provide added discouragement to foreign companies. In addition, obtaining heavy crude — or bitumen — from the oil sands and converting it into the light, sweet crude wanted by markets is a substantial investment and technological challenge that not all companies are willing to embrace.

“There’s a persistent view that it’s just too expensive to operate in Canada,” said Stephen Calderwood, a Calgary-based analyst with Raymond James Ltd. “The cost side of the equation is so obviously inflated here that it’s keeping people away.”

Consequently, the companies that appear most attractive to foreign firms are those well on their way to solving how to bring their crude to market, but aren’t prohibitively large enough to make a buyout too expensive. Publicly traded companies such as UTS Energy Corp., OPTI Canada Inc., Synenco Energy Inc. and Western Oil Sands Inc., all of Calgary as well as private oil sands firms such as North American Oil Sands Corp., also of Calgary, provide an easier entry point for foreign firms than larger, more-established ones, according to industry observers.

“Ideally, a company looking for a takeover would look for a company with a pure oil sands play that’s well-advanced, whose capital costs are known, and whose timing is reasonably sure,” said Jennifer Stevenson, managing director at Calgary-based Qwest Energy Investment Management Corp. OPTI Canada, which is bringing its oil sands project on-stream later this year, is an especially attractive prospect, she said.

Despite the recent period of quiet, the possibility of a major deal can’t be discounted entirely. In addition to potential suitors from Asia and Europe, two U.S. oil giants — Exxon Mobil Corp. of Irving, Tex., and Chevron Corp. of San Ramon, Calif., which both need to replenish their reserves — will likely come knocking on Alberta’s door one day.

“The last piece of the jigsaw that would finally validate the oil sands as a global resource and a strategic asset is a U.S. independent buying up one of Canada’s big players,” Ms. Stevenson said. “If the economics are right, you might see someone coming in and taking a big chunk.”

Sunday, April 08, 2007

© The Globe and Mail

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