Canada's oil sands may spark frenzy
by Laura King in Toronto and Claire Poole in Houston
TheDeal.com
5 Aug 2005
Two major deals cut in the past week totaling $6.7 billion in the bitumen-rich oil sands of northern Alberta have set deal benchmarks for a rush of other deals in the sector in the coming months.
With the $1.1 billion acquisition of Calgary-based upstart Deer Creek Energy Ltd. by France's Total SA, announced Aug. 2, and Kinder Morgan Inc.'s $5.6 billion purchase of pipeline company Terasen Inc., unveiled a day earlier, Canadian analysts and investment bankers say the deals herald the arrival of the oil sands as a global energy gold mine.
"These deals create a benchmark," said Steve Calderwood of Raymond James Ltd. in Calgary. "And it's a benchmark we think is a valid and important benchmark for resources which are undeveloped."
For decades, most foreign oil companies have been reluctant to delve into the gooey tar sands where billions of barrels of bitumen await extraction by complex and costly methods. But with skyrocketing oil prices amid rising global demand and political instability in key oil producing countries in the Middle East, South America and Southeast Asia, Canada's oil sands are now tempting.
Calderwood said the Deer Creek deal in particular — a pure-play oil sands takeout at 66 cents per barrel of bitumen in the ground — was higher than expected and vindicates bullish estimates for oil sands acquisitions. "We have room to move our targets higher," he said.
Shares in several Canadian companies with oil sands exposure, including Canadian Natural Resources Ltd., Suncor Energy Inc. and Opti Canada Inc., all increased in heavy trading after the Kinder Morgan and Total deals were announced.
With Deer Creek, Total gets access to the Joslyn Project, which the company calls a world-class oil sands play that's still in the early stages but comprises over 50,000 acres. And Kinder Morgan, already a minor oil sands player, wanted Terasen's pipeline network that carries oil from the oil sands to western Canada and the U.S.
Two weeks ago, Raymond James senior vice president and energy analyst John Mawdsley named Deer Creek as one of 14 companies whose exposure to the oil sands offered prime investment opportunities. "After almost a century of development, the time for Canada's oil sands has finally come," Mawdsley said. "Even with the significant share price appreciation of these energy-related stocks over the past year, the stars are aligning for companies involved in the oil sands."
Now, with two international oil sands deals, some analysts expect an oil sands buying frenzy. "Now that Total has bought into it and with $60 oil, everyone and their grandmother is looking to buy in," said Fadel Gheit, a longtime oil analyst at Oppenheimer & Co. in New York.
"This is an area companies should have been lining up for," he added. "This has been going on for a long time, but it's not your conventional oil technology. It's not the same skill set you need from your geologists. It's a different animal."
Still, Gheit said he expects companies without those specific skill sets to enter the fray soon. "We have not seen smaller companies like Anadarko [Petroleum Corp.] or Apache [Corp.] getting into this," he said. "Everybody is into coalbed methane. But the oil sands and heavy oil, they haven't gotten into. It's there, in front of them, but it's not their expertise."
Oil sands technology and extraction is highly specialized. Originally known as the tar sands, the oil sands in northern Alberta are a thick, molasses-like mixture of sand, bitumen and water.
The minable oil sands are found in seams up to 50 meters below the surface and are extracted using open-pit mining. The oil sand has to be highly refined to make it transportable by pipeline.
Deeper deposits, which are more plentiful, require more complex extraction methods that are riskier and still unproven.
Tom Ebbern, managing director of research at Tristone Capital Inc. in Calgary cautions that although there's renewed interest in the oil sands there are only a handful of pure-play companies that would provide buyers with the right technology to be able to afford to enter the oil sands.
He also notes that most oil sands development to date has been through open pit or strip mining, but the bulk of the oil sands potential lies in the deeper veins that require the more specialized, and expensive, extraction methods.
"While there is a lot of interest, there are probably not a lot of players that could move in without some prior experience," Ebbern says. "There certainly are some horror stories of cost overruns."
Most of the world's biggest oil companies, including Royal Dutch/Shell Group, ExxonMobil Corp. and ConocoPhillips Co., already have stakes in the oil sands through partnerships with Canadian companies or subsidiaries. In early July, Imperial Oil Ltd. and ExxonMobil said they plan to spend as much as C$6.5 billion ($5.3 billion) on a joint oil sands project. On July 12, they filed regulatory applications for the Kearl mining project that they expect will come on-stream at 100,000 barrels per day of bitumen in 2010 and grow to 300,000 barrels a day by 2018.
Observers expect China's CNOOC Ltd. to make a second foray into the oil sands after dropping its bid last week for Unocal Corp. In April, CNOOC bought almost 17% of Calgary-based MEG Energy Corp. for $122 million.
Privately held MEG is a small company compared with oil sands pioneers but it's already attracting attention. In March, U.S. private equity house Warburg Pincus LLC invested $44.3 million in the startup and a group of institutional investors managed by a Boston-based firm earlier invested C$26 million.
Besides MEG, UTS Energy Corp. and Synenco Energy Inc. have sold stakes in their companies or oil sands projects in the last few months. In May, SinoCanada, a subsidiary of Chinese oil giant China Petroleum & Chemical Corp., invested $119 million for a 40% stake in Synenco's Northern Lights oil sands project.
Synenco is privately held but is about to go public and is high on analysts' lists of potential takeover targets.
CIBC World Markets Inc. analysts Andrew Potter and Robert Plexman said in a research note last week that oil sands pioneer Suncor Energy Inc. is also a likely prospect for potential buyers. And Calgary-based Petrobank Energy and Resources Ltd. is expected to be ripe for takeover once its fine-tunes its technology for increasing the amount of bitumen that can be pumped from underground.
Last month, U.S. Treasury Secretary John Snow toured an oil sands project. Snow was wowed by the vast energy source so close to home and said the U.S. is keen to remain a key market for oil sands production, especially given the recent Chinese investments in the massive project.
Canada is the largest supplier of crude and refined oil to the U.S. It provided 2.1 million barrels per day in 2004, 17% of U.S. oil imports and 10% of American oil consumption. The tar sands alone account for 31% of Canada's oil production and are expected to grow exponentially over the next 30 years. |
