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Providing coverage of Alaska and northern Canada's oil and gas industry
June 2006

Vol. 11, No. 25 Week of June 18, 2006

Much ado about Arctic natural gas

Canadian Superior Energy enters fray as deadline on Petro-Canada bid for Canada Southern nears; others said to be interested

Gary Park

For Petroleum News

Competition for a bundle of Arctic natural gas assets has taken more twists and turns as Petro-Canada’s unsolicited offer for Canada Southern Petroleum winds down to its June 20 expiry date.

Offshore plays in Trinidad and Tobago and Nova Scotia have been dragged into the mix as Canadian Superior Energy, under renegade Chief Executive Officer Greg Noval, has tried to seize the controls.

With Petro-Canada refusing to sweeten its bid, Canada Southern had suggested to its shareholders that better deals were in the offing, indicating as many as four “significant companies” might surface.

Chief Executive Officer John McDonald told Canada Southern shareholders at their June 8 annual meeting that other contenders have been invited to visit a data room, a process he said is “ongoing,” building optimism that a better deal will be tabled.

So far, only Canadian Superior, a junior E&P with a considerable history of legal and regulatory tangles and internal upheavals, has publicly declared its interest in the frontier assets.

It has floated a cash-and-shares offer it figures is worth upwards of C$130 million, estimating that is 11 percent better than Petro-Canada’s all-cash offer.

In a statement, Noval built a case to Canada Southern shareholders around the ventures his own company has in the wings.

He said Canadian Superior is presenting Canada Southern investors with a “tremendous immediate opportunity” to benefit from his company’s land position in Trinidad and Tobago “where some of the most prolific natural gas wells in the world are located in proximity to Canadian Superior’s acreage” and where two wells are scheduled for the final quarter of this year.

He noted that wells offsetting Canadian Superior’s Intrepid Block 5 (c) are producing 400 million cubic feet per day and BP has just started producing 800 million cubic feet per day in an area where the super-major has 15 of its largest 25 yielding wells in the world.

Noval said several majors, including Petro-Canada, Total, British Gas, Husky and Apache, have shown interest in the Trinidad block.

But, typical of his lone-ranger style, Noval said Canadian Superior and its financial partner Challenger Energy have opted to drill the Caribbean prospect without help.

Nova Scotia a turbulent episode

Canadian Superior also tied its pitch to its 1.29 million acres offshore Nova Scotia, where it is the largest public holder of exploration land and its onshore oil and gas operations in Canada, including coalbed methane acreage in Alberta where it noted EnCana has been paying up to C$2 million per section for coalbed methane rights.

Nova Scotia has been one of Canadian Superior’s most turbulent episodes after 50 percent partner El Paso refused to finance the testing of the Mariner I-85 exploration well — a C$30 million undertaking that generated a dozen press releases of a mostly upbeat nature during the drilling.

The fallout involved a spate of lawsuits in the U.S. and Canada, accusing the company of issuing “false and misleading” releases.

Canadian Superior ended a three-year working relationship in fall 2004 by acquiring all of El Paso’s Nova Scotia holdings for an undisclosed amount, still confident that the play has the potential to turn the company from a bread-and-butter producer to a high-impact frontier operator.

Although Noval made no mention of Canadian Superior’s desire to add long-term Arctic prospects to its portfolio, company director Richard Watkins said the appeal to his company is Canada Southern’s “great set of assets” in the Arctic Islands and Yukon.

He said Canadian Superior has been “watching” the properties for some time and saw Petro-Canada’s offer as the “catalyst” to make a second hostile run at Canada Southern.

The magnet is Canada Southern’s mixed bag of carried and working interests in seven of 16 significant discovery licenses in Canada’s Far North, two of which are rated among Canada’s top five gas discoveries.

The assets include Drake Point, a 1969 find that is estimated to contain 54 trillion cubic feet, Hecla’s 1972 discovery of 3.2 tcf and Whitefish, a 1979 strike listed at 2.4 tcf.

Petro-Canada, as the largest leaseholder in the region, said it wants to consolidate the scattered ownership and position itself as the strongest contender to develop the resources.

But the company is just as adamant that its offer for Canada Southern is fair and won’t be improved.

Petro-Canada concedes obstacles

From the outset, Petro-Canada has conceded many obstacles — technological, fiscal and the outlook for commodity prices — stand in the path of developing such remote resources and insisted it has no plans in place to develop the Arctic.

It said studies of Arctic gas have generally been limited to the Drake and Hecla fields because others are “remote, small, subject to harsh conditions and are not thought to be viable on their own.”

Petro-Canada said there is “significant uncertainty” surrounding the technical and economic prospects of Arctic resources, adding it believes Canada Southern’s claims to hold 927 billion cubic feet of marketable gas are too high.

Canada Southern, 95 percent of whose shareholders are believed to be U.S. residents, is adamant that Petro-Canada’s bid doesn’t properly value the Arctic interests.

McDonald told the annual meeting that an announcement of Arctic development plans from a major company is “very near,” without disclosing more details.

However, company Chairman Richard McGinity conceded that Canada Southern, with only six employees, is in no position to finance development of the fields.

He said valuing the assets is not easy when the future of the Arctic is so uncertain.

“It’s difficult for shareholders and it’s a challenge for their elected directors. It’s not simple,” he said.

In one of the few attempts to forecast a development schedule, the Canadian Energy Research Institute has concluded that Arctic gas could be produced economically in 2014, using liquefied natural gas or gas-to-liquids technology.

But even if that date were realistic, it would be five years after Petro-Canada and TransCanada are scheduled to start operations at their proposed LNG terminal at Gros Cacouna, Quebec.






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