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Vol. 11, No. 5 Week of January 29, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Invaders on the horizon

Canadian-owned companies shed foreign production, brace for possible takeovers

Gary Park

For Petroleum News

Having ended a year when its companies staged a major pullback from global operations, Canada could face a year when a foreign invasion changes the complexion of its domestic industry.

Producing properties, reserves and pipeline assets were shed in large quantities as Canadian-based companies disposed of holdings that in many cases were a greater source of grief than reward and in others were part of a strategic realignment.

Now speculation is building that at least one of Canada’s leading oil and gas producers will be swallowed by one of the many international giants scouring the world for fresh opportunities.

Based on the 13th annual Canadian Energy Venture Abroad report by analyst Ian Doig, Canadian E&P companies entered 2005 producing 905,000 barrels per day of crude oil and natural gas liquids in 31 countries and almost 2 billion cubic feet per day of gas.

Over the past 12 months there has been a dramatic slide in those volumes.

EnCana’s focus in North America

No company was more active than EnCana, which has decided its future lies in unconventional resource plays in North America.

It bailed out of an increasingly troublesome venture in Ecuador by selling 75,000 bpd of production, 143 million barrels of reserves and a 36.3 percent stake in a 450,000 bpd pipeline for US$1.42 billion to Andes Petroleum, a joint venture of Chinese state-owned companies believed to include China National Petroleum Corp.

That was followed two months later when it unloaded a 50 percent interest in the Chinook heavy oil discovery offshore Brazil to Norway’s Norsk Hydro for US$350 million, although EnCana had not booked any reserves for the discovery and is continuing an active exploration program on several other concessions offshore Brazil.

Those deals trailed EnCana’s late 2004 bailout from the British North Sea, when it sold interests in a major discovery, two producing fields and interests in exploratory blocks covering 740,000 net undeveloped acres for US$2.1 billion.

The surprise buyer of those holdings, including a resource base of 250 million equivalent barrels and output of 19,000 barrels of oil equivalent per day expected to reach at least 90,000 barrels in 2007, was EnCana’s cross-town rival Nexen.

PetroKaz departs Kazakhstan

By far the most celebrated and controversial sale of 2005 involved the departure from Kazakhstan by PetroKazakhstan, ending a turbulent 15 years in the one-time Soviet republic.

China National Petroleum Corp. paid US$4.18 billion for 550 million barrels of reserves, production of 153,000 bpd and Kazakhstan’s key refinery.

The transaction was concluded amid a tangle of threats, lawsuits and accusations of an unfair deal, but has since been resolved with state-owned KazMunaiGaz negotiating a deal with the Chinese owner to acquire a major stake in the oil production and refinery.

Simultaneously, Nelson Resources, another company with Canadian interests, was pulling up stakes in Kazakhstan after five years of turning a bargain purchase of Kazakh oil fields into 270 million barrels of reserves and 32,000 bpd of production.

Russia’s giant Lukoil scooped up those assets for US$2 billion, amid accusations from angry Nelson shareholders that five insiders of their company had sold 4.7 million shares for C$2.82 each two weeks before the Lukoil offer of C$2.57.

China National teamed with India

China National Petroleum Corp. again surfaced in a Canadian-related deal in December when it teamed up with India’s state-controlled Oil & Natural Gas Corp. to pay C$676 million for Petro-Canada’s 38 percent share of a Syrian oil project.

The two Asian buyers will share 58,000 bpd of production from reserves of 66.3 million barrels in the Al Furat field, a venture with Royal Dutch Shell and Syria’s national petroleum company.

Although the assets contributed significant volumes, they represented less than 4 percent of Petro-Canada’s earnings and were an increasing source of grief because of the fiscal terms imposed by the Syrian government.

In addition Al Furat was in rapid decline from the net 106,300 bpd that Petro-Canada enjoyed three years ago and was blamed by analysts for a large portion of a 12 percent drop in Petro-Canada’s shares a year ago.

Wilf Gobert, vice chairman of Peters & Co., described the economics of operating in Syria as “horrendous,” with the government taking 95 percent of any price increases.

Talisman adds to North Sea holdings

The one significant reversal of the Canadian pullback occurred in late 2005 when Talisman Energy hooked Britain’s Paladin Resources for C$2.5 billion, adding to its substantial North Sea holdings.

Of Paladin’s 190 million boe of proved plus probable reserves, 75 percent are in the Norwegian, British and Danish sectors. In addition, Norway offers 600,000 net undeveloped acres and underpin Talisman’s goal of boosting output to 70,000 boe per day in 2009 from the current 46,000 boe per day.

Even limiting the count to the major divestitures, it appears overseas oil production by Canadian-owned companies dropped by about 318,000 bpd, wiping close to one-third of the 2004 tally.

What’s next is far from certain, but persistent speculation focuses on the chances of a Canadian company falling into the fold of an international company other than one based in the United States.

The Chinese and Indians are always a threat as they fan out around the globe in their desperate effort to meet domestic oil demand; Royal Dutch Shell is hungry for new reserves; and France’s Total has set a goal of producing 500,000 bpd from the Alberta oil sands, more than double the projects it already has under way.

When such super-majors are in the buyers’ market, virtually every Canadian-controlled E&P company could be seen as potential quarry.

There has been no shortage of rumors over recent months involving EnCana, Petro-Canada, Talisman Energy, Nexen and Canadian Natural Resources.

Speculation over Shell and EnCana

The speculation reached fever pitch in October when Royal Dutch Shell was claimed to have made an offer for EnCana, forcing the Canadian independent to issue a denial.

Randy Eresman, who has just taken over as EnCana chief executive officer from Gwyn Morgan, said that even if his company stumbles in its pursuit of production goals it will remain a large company, outside the reach of all but a few predators.

It would also be challenging for those companies larger than EnCana to launch a raid, given that they trade on measures of earnings, while independents trade on measures of cash flow, he said.

It would be difficult for one of the global giants to digest EnCana because of the impact “we’d have on their earnings in the short run,” Eresman told the Calgary Herald.

He left no doubt that EnCana will not be a willing seller because of its unwavering commitment to its asset base and its “unbooked” resource potential in natural gas and the oil sands.

At the same time, Eresman said EnCana has no thoughts of doing major acquisitions because of the large inventory of land in its portfolio.

“There is no need for us to do any acquisition,” and besides making a deal in a high price environment “is very challenging,” he said.

Speculation around Talisman

Talisman Chief Executive Officer Jim Buckee has often said he would not want or welcome a takeover bid, although the door is open to any prospective buyer who is willing to pay a premium.

Intense speculation in the second half of 2005 that Talisman was being targeted culminated in November when Buckee confirmed that an offer had been made by an unidentified “major,” and was rejected because it fell short of the required “fat premium.”

One of the first to topple in 2006 could be high-flying Niko Resources, which produces oil and gas in India and Bangladesh.

Before Christmas it rejected a preliminary US$1.4 billion takeover bid by Indian Oil Corp., India’s largest refiner, for most of Niko’s assets in that country.

Indian Oil offered roughly C$50 a share and was expected to return with something closer to C$70, despite a 28 percent slide in Niko’s stock in recent months from a record high of C$71 in March.

Niko has an estimated 530 billion cubic feet of proved plus probable gas reserves and 200 million barrels of oil and liquids.

Vic Vallance, an analyst with Fraser Mackenzie in Toronto, said the attempted takeover of Niko was an example of how shareholders in higher-risk international plays were able to cash in on speculative investments.

He said there are usually exit opportunities for companies “if they get to a certain size,” especially in a country like India where there are many buyers for not many properties.

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