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Globe & Mail (Canada): Energy deals face uphill battles

Energy deals face uphill battles
SHAWN MCCARTHY
GLOBAL ENERGY REPORTER

From Thursday’s Globe and Mail
Thursday, March 13, 2008 Page B1

OTTAWA — Alberta’s booming oil sands industry faces a chill in merger and acquisition activity as a result of rising construction costs and new federal rules aimed at reducing greenhouse gas emissions from future projects, according to an international consultant on oil industry deal making.

Even in the face of crude oil prices close to $110 (U.S.), unconventional oil projects face serious issues that will likely cool investor interest, said Tom Biracree, senior vice-president at Connecticut-based consultancy John S. Herold, which yesterday released its widely watched annual study of global mergers and acquisitions in the oil industry.

While many analysts argue the oil sands remain attractive to foreign investors, Mr. Biracree points to a list of problems. Galloping inflation in construction costs and wages, higher tax takes by provincial and federal governments, and Ottawa’s announcement this week that future oil sands projects must dramatically reduce their greenhouse gas emissions could all deter investors.

“There is reason for optimism about the ultimate resource potential,” Mr. Biracree said.

“But in the short term until some of these uncertainties settle out – particularly the impact of taxation and the whole carbon emission problem – there might be some parties who would be reluctant to make major commitments.”

According to the study, which was carried out with British bank Standard Chartered PLC and is regarded as the authoritative gauge of oil and gas sector deal making, Canada last year saw a record number and value of deals – takeovers and asset purchases – in the industry, led by the oil sands and the royalty trust sector.

Some 40 per cent of that activity was related to the oil sands as major international buyers, including Royal Dutch Shell, BP and Norway’s Statoil, concluded deals.

The value of proven oil sands reserves – as represented by those deals – climbed to $14.78 a barrel from an average of $11.85 in 2006 transactions, the study said.

The analysts, however, are not expecting another stellar year this year for deal making in the oil sands.

Canadian analysts are divided over the risk that the environmental rules pose to the oil sands. In a note, Andrew Potter, an analyst with UBS Securities Canada Inc., said Ottawa has created a great deal of uncertainty because it is not clear how aggressively players in the oil sands will actually have to reduce their emissions.

In the plan announced this week, Environment Minister John Baird said projects that begin operations after 2011 will have to reduce emissions to a level that would be consistent with the use of carbon capture and storage technology.

However, it is not clear, Mr. Potter said, whether all emissions – or only some portion of them – will have to be captured.

A modest requirement could cost oil sands producers roughly $1.50 a barrel to implement, but a more ambitious target “could result in significant [net asset value] reductions,” he said.

Economist Peter Tertzakian of ARC Financial Corp. said oil sands producers have seen their market value stagnate, even as crude prices close in on $110 a barrel, suggesting that the market supports Mr. Biracree’s view.

Mr. Tertzakian said major companies in the oil sands will continue to expand, but smaller players face relentless inflation in construction and natural gas, and problems with access to capital.

ARC has an index of seven oil sands producers, whose stock prices have shown little effect from the stunning rise in crude prices over the past year.

“What that tells you is that the equity markets don’t believe any extra value is being created right now, even with the higher oil prices,” he said.

Peter Linder of Delta One Energy Fund said he believes the oil sands will remain an attractive place for international oil companies to make investments in order to replenish their reserves.

“I would say I have between zero and no concerns,” Mr. Linder said.

“There’s a reason why I think oil won’t go under $100 for the rest of this decade, and the reason is it is very difficult to replace production worldwide. And the tar sands is one of the only safe – in terms of geopolitics – risk-free places to grow production.”

Mr. Linder said costs will rise – both as a result of construction inflation and environmental requirements – but that production from the oil sands will remain “very economic.”

http://www.theglobeandmail.com/servlet/story/RTGAM.20080312.wroildeals13/BNStory/energy/home

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