Majors stake out oil sands holdings

Claudia Cattaneo
Financial Post
Tuesday, February 17, 2009

While no one seems to be looking, the oil sands landscape is poised to change once again as global oil majors take steps to stake out even bigger holdings.

But in contrast to the last wave of foreign takeovers, made at hefty premiums and sometimes for marginal properties, multi-nationals including Paris-based Total SA, London-based BP PLC and Irving, Tex.-based Exxon Mobil Corp. are hunting for top-drawer properties at today's cheap stock prices or taking advantage of the sector's downturn to bolster their presence.

As one investment banker put it: "If you are a major, this is a once-in-a-generation opportunity to build a huge position."

Why now? Oil majors remain financially healthy even in today's environment of depressed oil prices. They've been in the business long enough to know that oil prices are cyclical and that the current downturn won't last. Those that missed acquisition opportunities in the past see the current downturn as a reentry point at low prices.

They see access to new reserves globally as a challenge. They have refineries in the United States that need feedstock. There are plenty of buying opportunities that were not there when oil prices were high.

Paris-based Total has been front and centre with this strategy. The company made a hostile bid for UTS Energy Corp. that could ultimately put it in the drivers' seat of the cost-challenged Fort Hills oil sands project.

If the UTS takeover, now in progress, is successful, giving it 20% of the Petro-Canada run project, Total is expected to secure another 20% by buying out Teck Cominco Ltd.'s 20%, and possibly get Petro-Canada to hand over another piece, increasing its stake to at least 50%.

Industry sources say it wouldn't be a stretch for Petro-Canada and Total to split the integrated oil project into two, with Petro-Canada developing the mine near Fort McMurray and Total building the upgrader near Edmonton.

Total seems to be confident no one will challenge its move on UTS. The bid and its Canadian oil sands plans were mentioned a surprising number of times by Total in its analyst call last Thursday to discuss fourth-quarter results.

"Heavy oils are an important component of our strategy," Yves-Louis Darricarrere, president of Total's exploration and production division, said in Paris. "So, we are grasping at opportunities available to us to consolidate our portfolios while making acquisitions at reasonable costs, as you know, Synenco [Energy Inc., another oil sands company acquired by Total] in 2008 and of course the bid we made for UTS."

If Total is successful, expect others to test the hostile takeover route in a world where white knights are in short supply due to liquidity constraints.

The other name to watch is BP. The company has appointed Anne Drinkwater to run its Canadian operation, which has been quietly elevated in the British major's hierarchy to a "strategic" unit. Ms. Drinkwater, a former executive assistant to BP CEO Tony Hayward, a role reserved for up-and-coming executives, started her new job in Calgary in January. Ms. Drinkwater previously ran BP businesses in Norway, Indonesia and Angola.

The new leader will have a broader role in Canada than her predecessors, said BP spokesman Robert Wine from London.

"[Canada] has been a bit of a quiet corner of the BP empire and has picked up," with the Husky Energy Inc. oil sands joint venture and its links to BP's refineries in the United States, and planning for the Alaska gas pipeline, he said.

Industry sources say one of Ms. Drinkwater's mandates is to build the oil sands business, an area where BP has the smallest presence among oil majors because of its late entry last year with the Husky partnership.

While BP's name has come up in connection with a possible move on Suncor Energy Inc., whose value in the market has shrunk to a bargain $23-billion, the British company is likely eyeing a large in-situ position, which it sees as more environmentally palatable than mining projects.

BP is slowing down its Husky joint venture to take advantage of lower costs during the downturn. But the company has said repeatedly it would like more oil sands. As Mr. Hayward put it: "The future is not cancelled."

Exxon Mobil Corp. is the other oil major that will have a greater presence in the oil sands, a sector for which it had only passing interest in the past.

For now, the world's largest oil company is growing internally by developing the Kearl mining project with its Canadian subsidiary, Imperial Oil Ltd., while almost everyone else has put plans on hold.

Will Exxon Mobil make a large oil sands acquisition? It's certainly been talked about in connection with Suncor as well as Canadian Oil Sands Trust, which has the largest interest in the Syncrude Canada Ltd. joint venture. Already, Exxon Mobil is managing the project and Imperial owns a 25% stake. Regardless, Exxon Mobil will be more visible and more influential in Alberta, and the oil sands are becoming even more of a global oil village.

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