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EXPLORERS USA 2005: Emerging from shadows of state influence Petro-Canada CEO has a clear road map to long-term value, even if others get confused by the company’s occasional detours Gary Park Petroleum News Calgary Correspondent
Thirty years after it was created as a state-owned enterprise, Petro-Canada is no longer encumbered with the stigma of even a distant association with the Canadian government, although in reality it has functioned for many years as a private-sector company.
It’s now six months since Ottawa sold its final 19 percent in Petro-Canada, ending what Chief Executive Officer Ron Brenneman viewed as a non-issue, but one he conceded hindered efforts to broaden the company’s shareholder base.
The challenge now is for Petro-Canada to convince those formerly doubting shareholders that the integrated oil company is on a well-defined path to building long-term value.
For some observers, tracking Petro-Canada over the years has been a bit like herding cats: You have no idea what they’ll do next.
Consider these examples:
• When the budget started to run out of control on a major oil sands upgrader, Petro-Canada slammed the brakes on big-time ventures in northeastern Alberta, only to stage a comeback in March 2005 by grabbing a 60 percent share of the Fort Hills project, committing itself to an initial investment of C$900 million that could grow to C$3 billion by the end of the decade.
• In 2000, it declared an end to its global ambitions, announcing a retreat to the domestic front; two years later it pulls off a C$3.2 billion purchase of the international operations of Germany’s Veba Oil & Gas.
• A year ago it signaled an intention to push into such geopolitical hot spots as Venezuela, Libya, Algeria and Syria in a bid to correct its dismal 2003 record of replacing only 52 percent of international production. In May 2004, Syria was held out as a good bet to reverse a slide in production from the shaky Middle East regime to 74,700 barrels of oil equivalent per day in 2004 from 91,700 boe per day in 2003. Hopes were high for a 300 million cubic feet per day gas production sharing agreement with the Syrian government, until those negotiations abruptly collapsed late last year.
• North American natural gas was given a cold shoulder as Petro-Canada chose not to reinvest in its Western Canadian business in the belief that high prices were not sustainable. That conviction was jettisoned in mid-2004 when Prima Energy’s coalbed methane and tight gas assets were snapped up for C$719 million, giving Petro-Canada 50 million cubic feet per day of production from the U.S. Rockies and putting it in the same geographic league as EnCana, Kerr-McGee and Pioneer Natural Resources in taking a gamble on unconventional gas.
Regardless of its past views and its lack of experience in the unconventional gas sector — what EnCana calls “resource” plays — North American gas pumped C$500 million into net earnings and helped convert Petro-Canada into a “significant and sustainable market participant by accessing new and diverse natural gas supply sources” on the continent. Answer to critics But Brenneman has an answer for critics who find themselves bewildered by Petro-Canada’s twists and turns.
“From time to time, circumstances have prompted us to make some adjustments within (the corporate) framework,” he told investors March 31. “But, for the most part, we’ve stuck to our plans.”
The supports in that framework are a diverse basket of assets to provide “strength in diversity,” he said.
Brenneman said Petro-Canada is positioned to benefit from changes in the market, including a chance to develop new sources of North American gas supply and access to undeveloped international reserves.
He claims credit in his five years at the company’s helm for introducing a “no-nonsense approach to bottom-line results, asserting that the words “decisive” and “results-oriented” are now at the forefront of every employee’s mind.
Spending has been tightened, progress is being made towards increased production, earnings have increased 22 percent a year since 2000 and the share price during Brenneman’s time has climbed from C$20 to upwards of C$70. Core plus new sources Figuring large in the new, disciplined Petro-Canada are continued exploitation of four core conventional gas areas in Western Canada, where output is 630 million cubic feet per day, and plans to build on three new sources of gas supply:
• Unconventional gas following last year’s purchase of Prima that immediately added 50 million cubic feet per day of coalbed methane and tight gas and enough acreage to double U.S. Rockies production by 2007.
• Northern gas, by building a reserves and land position in the Mackenzie Delta/Corridor and extensive acreage in Alaska to cover the certainty that a pipeline will be built from either the North Slope or Mackenzie Delta. “It’s not if a pipeline will be built, it’s which one and when,” he said.
• Liquefied natural gas, where Petro-Canada has a stake in gas production in Trinidad and is part of a joint proposal to build a regasification terminal in Quebec. As the company’s international arm works on the upstream end of the LNG equation it provides value from integration, Brenneman said.
• Potentially the biggest deal of all is a joint study with Russia’s Gazprom, the world’s largest gas company, which could see LNG being shipped from Russian markets to North America by 2009 — a venture that could cost Petro-Canada up to US$4 billion. Brenneman will only say that he expects “results from our work with Gazprom” over the next year or so. Oil sands, East Coast and international In the oil sands, Petro-Canada’s decision to enter the Fort Hills project expanded an extensive base that includes a 12 percent working interest in the Syncrude Canada consortium, currently netting 28,000 barrels per day and 100 percent of the MacKay River in-situ project that yields 24,000 bpd. “These are quintessential long-life assets,” he said. “And we’re one of only a few established players with both mining and in-situ developments.”
The Fort Hills project, which could see production of 100,000 bpd by 2009 and cost up to C$5 billion, including an upgrader, may also need a third partner, said Brent Sangster, senior vice-president of oil sands development.
He said Petro-Canada and UTS are ready to dilute their stakes by a combined 10 percent to attract a company with mining expertise.
On Canada’s East Coast, Petro-Canada is positioned in every major oil project and could benefit from up to 80,000 bpd well into the next decade.
From the Veba platform, the company has established three core areas — Northwest Europe, with North Sea holdings destined to add 80,000 bpd by 2006; North Africa/Near East with production in Syria and Libya; and North Latin America, with supply gas from Trinidad to the Atlantic LNG facility and a potential project in Venezuela.
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