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Vol. 11, No. 21 Week of May 21, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Playing to win in the Arctic

Petro-Canada initiates rare hostile takeover to access discovery, licenses

Gary Park

For Petroleum News

Petro-Canada has awakened interest in one of Canada’s most remote frontier oil and gas prospects by launching a hostile bid for a junior company that holds various interests in 39,000 acres of the Arctic Islands.

Having failed to negotiate a friendly takeover, Petro-Canada put C$113 million cash on the table for Canada Southern Petroleum or US$7.50 a share, representing a 45 percent premium over a weighted average trading price on Nasdaq for the 30 days prior to May 11.

Giving a further lift to hopes that Canada’s northern gas will eventually find a way to market, exploration companies posted new record to secure rights in the Central Mackenzie Valley, committing a combined C$70.7 million for six parcels, beating the 2004 benchmark of C$63 million.

Leading the way was a 50-50 partnership of Talisman Energy and Devon Energy which took four of the parcels covering more than 840,000 acres for C$53.9 million.

Petro-Canada Senior Vice President Kathy Sendall said Canada Southern is an “excellent fit with our long-term strategy to build a meaningful resource case in the North and its conventional producing assets can easily be integrated into our Western Canadian operations.”

Already player in Mackenzie Delta and Alaska

She said Canada Southern’s interests in discovered gas resources in the Arctic will bolster Petro-Canada’s existing position in the Canadian Arctic and Mackenzie Delta. (Petro-Canada also holds acreage across the border in northern Alaska.)

Canada Southern holds about 39,000 acres and has mixed bag of stakes in seven significant discovery licenses and one production permit from finds made in the 1970s and 1980s.

Canada Southern: not fair value

Canada Southern Chairman Richard McGinity said Petro-Canada was unwilling to pay fair value for his company’s assets, notably the large Arctic gas resources.

Petro-Canada already has interests in many of those licenses, which Canada Southern said have a “significant amount of gas” that has remained stranded because there is no pipeline from the Arctic region.

But it said that could change if the Mackenzie Gas Project goes ahead or facilities are built to turn Arctic gas into liquefied natural gas or compressed natural gas for tanker shipment to pipelines.

The bulk of Canada Southern’s interests are “carried interests,” which means the dominant owners have to recover the costs of development before the holder of the carried interest receives any money.

Petro-Canada already has 187,000 acres in the Arctic Islands.

UBS analysts Andrew Potter and Michael Rimmell said that although the bid for Canada Southern is a “rather expensive land grab,” it is “likely a good long-term strategic move considering the massive potential of reserves in the region.”

They said the primary motivation for Petro-Canada to initiate a rare unfriendly takeover attempt is to “consolidate the lands in the Arctic Islands.”

Issue of large-company survival

Octagon Capital analyst Jeffrey Fiell told the Financial Post that as large companies find it increasingly difficult to grow their holdings and the notion that the world is not going to discover more large reserves takes hold, companies that “want to survive in the long term have to start thinking 10 years down the road to ensure that they have got a decent production base.”

Petro-Canada is one of the largest land holders in the Mackenzie Delta-Beaufort Sea region and has a gas discovery on the Delta with Devon Energy that is estimated to have up to 300 billion cubic feet in recoverable reserves.

It has also been part of the Mackenzie Explorer Group of mostly independent companies who have been drilling for gas to support a one-third equity stake in the Mackenzie pipeline by the Aboriginal Pipeline Group.

But Petro-Canada has not joined Anadarko Canada, BP Canada Energy, Chevron Canada, Devon Canada, EnCana and Nytis Exploration in a notice of motion filed with the National Energy Board urging the federal regulator to establish a single jurisdiction.

Canada Southern ended 2005 with proved plus probable reserves of 2.275 million barrels of oil equivalent, 252,000 undeveloped acres and average production for the year of 1,104 boe per day, 68 percent of that coming from its 30 percent stake in Yukon’s Kotaneelee gas field, which has experienced some operational hitches.

Central Mackenzie active exploration zone

The successful Central Mackenzie call for bids came only a week after the Canadian Department of Northern and Indian Affairs posted solid results from its Mackenzie Delta-Beaufort Sea auction.

A partnership of EnCana, Anadarko Canada and ConocoPhillips Canada landed 140,000 acres on the Delta for C$40.27 million, while Shell Canada took a plunge into the Beaufort, obtaining rights to 247,000 acres for C$11.55 million.

The Central Mackenzie is fast emerging as an active exploration zone as confidence grows among companies that the Mackenzie Gas Project pipeline will be built, giving them access to southern markets.

Talisman-Devon bid C$32.8 million for 212,488 acres, C$12.15 million for 208,436 acres, C$5.13 million for 204,648 acres and C$3.85 million for 215,429 acres.

Of the other two successful bids, Paramount Resources pledged C$6.3 million for 217,132 acres and a consortium of operator Husky Energy 25.9175 percent , Northrock Resources 27.685 percent, EOG Resources Canada 26.3975 percent, Pacific Rodera 12.5 percent and International Frontier Resources 7.5 percent pledged C$10.5 million for 218,565 acres.

Most of the companies already have promising exploration programs in the Central Mackenzie.

Winning bidders must submit work deposits covering 25 percent of their commitments to obtain an exploration license, which requires them to drill within four years to extend the term by another four years.

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