Ed Crooks Suncor and Petro-Canada begin oil sands consolidation

Breaking news this morning: Suncor Energy has announced it is buying Petro-Canada for about C$20bn. The two companies are describing the deal as a merger, but it is really a takeover. The interesting question now is whether, now the ice has been broken, other companies move to do oil sands deals.

The all-share deal to create Canada’s biggest energy company was announced early on Monday morning. It is the largest deal in the global oil and gas industry since StatoilHydro was formed in 2006-07.

Although it is called a merger, the deal gives Suncor’s shareholders about 60 per cent of the merged company, with Petro-Canada’s holding 40 per cent. It also puts Suncor’s chairman at the head of the merged group. And the new company will be called: Suncor. So it really counts as a takeover.

The two companies have suffered similar falls in the share prices over the past year. Suncor is down about 35 per cent, Petro-Canada about 31 per cent.

The plunge in the oil price from over $147 a barrel last July to about $53 today has put all oil companies under pressure, particularly those operating in high-cost areas such as Canada’s oil sands.

Suncor is the second-biggest producer in the oil sands, and Petro-Canada has a significant presence there and ambitious expansion plans.

However, both announced last year that they had delayed large projects that would have increased their production.

Petro-Canada’s delayed Fort Hills project is one of the largest remaining undeveloped leases in the Athabasca oil sands region.

Industry estimates suggest existing oil sands projects need an oil price of about $40 a barrel to cover their costs, but a new project with substantial investment could need about $100 a barrel to be commercially viable.

Although costs in Alberta, which had been soaring because of shortages of staff, materials and equipment, have now begun to fall, executives believe consolidation is needed to rationalise the profusion of competing investment projects.

For example, most of the main operators in the region have plans to build their own upgrader, the plant required to transform the sludgy oil produced from the sands into a form of crude that can be sold in the US and other international markets.

Some of those proposed facilities will probably have to be cancelled, and the ones that are built can be shared.

In spite of the forces driving consolidation, the volatility of the oil price and difficulties in raising finance have put barriers in the way of potential deals.

A much-rumoured bid for Nexen of Canada by Total of France, which plans a large expansion in oil sands, has still not yet materialised.

However, Total has launched a $478m hostile bid for UTS Energy, which is a partner of Petro-Canada in its delayed Fort Hills project.

Other companies that are likely to attract interest? Encana, Canadian Natural Resources, Opti Canada and Husky Energycould all be appealing.