How much Canada’s most distant hydrocarbon prospects are worth in an age when the industry is chasing assets in politically stable regions is being put to the test.
Petro-Canada has made a hostile, all-cash bid of US$113 million to swallow Canada Southern Petroleum and lock up what the junior company estimates is 927 billion cubic feet of natural gas reserves in the High Arctic.
Operating through Nosara Holdings, a wholly owned unit, Petro-Canada said it has no intention of revising the bid that is due to close June 20.
Canada Southern counters that the unsolicited offer does not reflect the value of those interests.
Its board of directors has urged shareholders to sit tight while it pursues a better deal with as many as four other suitors, described as “significant companies” with an understanding of the area.
Among those companies with varying interests in the Arctic discoveries are BP, ExxonMobil, Imperial Oil and ConocoPhillips.
Poison pill swallowedTo ward off Petro-Canada for now, Canada Southern swallowed a “poison pill” on March 25.
Under the terms of the shareholder rights plan, existing investors will have the chance to buy half shares at half the prevailing market value once any potential acquisitor accumulates 20 percent of the outstanding shares.
Petro-Canada said May 30 it is pursuing legal action to have the rights plan overturned.
It’s a tussle without precedent in a region that attracted extensive exploration in the 1960s and 1970s, fueled by billions of dollars in federal government incentives for Canadian-controlled companies to probe the frontier in the interests of energy security.
During that time, Canada Southern gathered minority working interests in 39,000 net acres in the Drake Point, Hecla and Whitefish areas; Petro-Canada, initially created as a state-owned company, arrived on the scene later, inheriting interests from another northern explorer sired by the federal government.
For all of its desire to expand those holdings, Petro-Canada views its offer of US$7.50 a share as fair, representing a premium of better than 50 percent at the time it was made, although Canada Southern has since climbed almost 80 percent to pass US$8.60 as the market counts on a higher bid.
Canada Southern officials declined to respond in a May 25 conference call when asked to put a price on their shares, although a Petro-Canada circular said the target company sought a “significantly higher” number than the bid.
Petro-Canada said that amount is unrealistic given the challenges of extracting gas from the Arctic and, in a May 30 statement, suggested Canada Southern may have overstated its reserves.
McGinity: Arctic Islands coming to foreCanada Southern Chairman Richard McGinity said his company believes the Petro-Canada offer is “financially inadequate and fails to recognize the economic and strategic value of the Arctic assets.”
“At a time when geopolitical instability in Nigeria, the Middle East, Russia and South America is threatening the supply of oil and natural gas, the Arctic Islands are coming to the fore as a significant, discovered and secure resource with the potential for ready access to key North American markets, including Petro-Canada’s proposed LNG plant at Gros Cacouna, Quebec,” he said in a statement.
“Strategically, what Petro-Canada’s hostile offer has done is to indicate that the time for Arctic Islands natural gas development is approaching,” McGinity told a conference call. “How soon, I don’t know.”
A series of independent studies conducted between 1975 and 2001 rated discovered gas in the Arctic Islands at 19.8 trillion cubic feet, of which Canada Southern has a carried or working interest in 16 significant discovery licenses, which reflect an industry and National Energy Board belief that hydrocarbon accumulations are sufficient to achieve sustained production.
Canada Southern has interpreted that information and what it knows of the discoveries into a net marketable gas resource of about 927 billion cubic feet equivalent or 68 times greater than the junior company’s disclosed proved and probable reserves of 13.7 bcf equivalent.
But current disclosure rules in Canada and the United States prevent Canada Southern from claiming proved or probable reserves where there is no means of getting the gas to market.
However, McGinity said that “unless the rocks have moved, we believe that what was there in 1985 is there today.”
Petro-Canada pitched LNG in ‘80sThe company is also certain that Arctic gas development will be economically viable, given that 26 years ago Petro-Canada and others pitched the idea of an Arctic pilot project to deliver gas by LNG tanker to southern markets — a prospect that has since been endorsed by the Canadian Energy Research Institute, which suggested commercial development could be achieved through LNG or the emerging hopes for compressed natural gas shipments to terminals or northern pipelines.
Regardless of those prospects, McGinity concedes production from the Arctic region would be unlikely to occur before 2015, about six years after the Gros Cacouna terminal is scheduled to come on stream.
Petro-Canada insists it has no intention of developing Arctic gas because of a long list of challenges — technology; fiscal regime; financial strength of potential partners; commodity prices and the lead time to initial production — that stand in the way of any assurance of the gas being brought on stream in a “reasonable timeframe.”
It said significant consolidation of the existing diverse ownership in the various discoveries is required before any operating agreement can be negotiated allowing development plans to proceed.
In summary, Petro-Canada said there is “significant uncertainty” relating to the technical and economic development of the resources.
Tensions go back three monthsThe tensions between the two companies date back three months when Canada Southern began a third-party evaluation of its gas resource and Petro-Canada registered its initial expression of interest.
The geological data needed to undertake that assessment had its origins in the 1960s when Canada Southern was one of the first companies to gain exploration rights.
One of its partners then was Panarctic Oils, a venture by the Canadian government and several companies, which was in the forefront of Arctic exploration and for several years made an annual tanker shipment from Bent Horn to a Montreal refinery.
Panarctic was dissolved in 2000 and its assets, along with the geological data and seismic surveys were bequeathed to Petro-Canada.
That accumulation is reportedly stored in 700 boxes and has been delivered to Canada Southern over recent weeks, except for the seismic information that Petro-Canada is converting to an electronic format.
Canada Southern, which says it does not have time to examine all of the data by June 20, views the urgency in the Petro-Canada bid as suspicious, even though Petro-Canada has insisted it has “no immediate plans for any Arctic development.”
“They have more information than we do about our assets,” McGinity said.