National Post: Oilsands Canada’s own: Foreign players tread with caution around the patch

Claudia Cattaneo, Financial Post
Published: Tuesday, May 29, 2007

If there is a “hollowing out” trend underway in Canada because of foreign takeovers, it’s only marginally affecting the oilsands industry, arguably the country’s most strategic because it powers the economy.

Despite the recent rush into the sector by foreign companies from countries as diverse as China, Korea, Norway and France, the oilsands are — and are likely to remain — firmly under Canadian control.

Some reasons: The handful of Canadian companies dominating Canada’s Athabasca, Peace River and Cold Lake oilsands are so large they’ve become hard to buy. They’re so much ahead of their foreign competitors in terms of growth they are hard to beat.

They’re the leaders in a business so unique foreign players are continuing to tread with caution — so far, foreign acquisitions of oilsands companies have largely involved startups with lands but no production. Canadian players remain better equipped to manage rising costs and labour shortages. Most have large teams and infrastructure in place to deliver on their plans.

It should be noted that this Canadian success story did not result from government protectionism, which is where Canada’s federal Liberals seemed to be headed yesterday when they called for a three-month moratorium on foreign buyouts to study whether Canada’s investment laws are too lax compared with other countries.

The only Canadian oilsands company that enjoys protection is Petro-Canada. Under the Petro- Canada Act, no one entity can hold more than 20% of its stock. The company’s oilsands strategy, which has yet to receive corporate approval, is the least developed in the Canadian group.

According to statistics compiled by the Canadian Association of Petroleum Producers for a royalty review underway in Alberta, the six Canadian oilsands kingpins — in addition to Petro- Can, they are Suncor Energy Inc., Syncrude Canada Ltd., Canadian Natural Resources Ltd., EnCana Inc. and Nexen Inc. with its partner OPTI Canada Inc. — are responsible for the majority of current and startup volumes from the oilsands, or 1.1 million barrels a day out of 1.7 million of what the industry group calls ‘initial production.’

Those companies will also be at the controls of the majority of barrels that will come out in the future, or 3.1 million barrels a day in “potential production,” out of 4.9-million barrels a day. CAPP includes in its statistics only projects at advanced development stages.

The biggest foreign-controlled oilsands players — Royal Dutch Shell PLC, Husky Energy Inc., Imperial Oil Ltd., ConocoPhillips, Devon Energy Corp. and Total SA — while expanding aggressively, won’t grow as much as a group. The exception is Shell, which owns the best leases of the lot and plans to eventually produce 680,000 b/d from all its projects. Shell jumped into the business well ahead of the foreign herd. The rest are building on leases that are trickier to develop, either because they are farther away from the main hub or because they are not as good.

That Maple Leaf picture could change if one of the large Canadian companies were acquired. A takeout of Suncor, for example, which has plans to ramp up production to 925,000 barrels a day from its mining and thermal operations, could by itself tip the scale.

Yet such large acquisitions are improbable.

Adam Waterous, vice-chairman of Scotia Waterous, said the three major impediments are: size, which means only a handful of companies in the world can afford them; high valuation in the market in recognition of the oilsands upside, which means they’re not seen as bargains; and in most cases, they still have the majority of their assets outside of the oilsands, which is seen as undesirable.

The market capitalization of the six companies ranges from $50-billion for EnCana to $17-billion for Nexen.

In addition, the world’s largest oil companies seem to be more interested in returning cash from high energy prices to shareholders rather than launching into new projects. A study last week by John S. Herold Inc., a Norwalk, Conn.-based energy consultant, showed that Exxon Mobil Corp., Shell, BP PLC, Chevron Corp. and ConocoPhillips returned US$98-billion through share repurchases and increased stock dividends last year, almost the same as they invested in capital projects.

The next oilsands purchases by foreign companies are more likely to involve smaller bites: A Chevron or Shell takeout of oilsands partner Western Oil Sands Inc.; a purchase of OPTI, an Exxon takeout of the minority of Imperial Oil Ltd. Startups are also vulnerable, particularly if their ability to raise capital continues to be impaired by meddling politicians.

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© National Post 2007

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