Investors Jostle over the Oil Sands Prize

By Andrew Willis

South Korea’s $1.8-billion foray into the oil patch reinforces a long-established trend: Canada’s oil sands will be developed by foreign energy companies.

State-owned Korea National Oil Corp.’s friendly bid for Harvest Energy Trust (HTE) late Wednesday is just the latest in a series of takeovers aimed at building substantial holdings in the reserve rich, but capital-intensive oil sands. However, the deals are getting larger, as smaller plays are picked off, and buyers get comfortable with owning increasingly large properties.

KNOC, as the South Korean oil company is known, is stepping up several notches by acquiring Harvest. It’s only other Canadian acquisition came in 2006, when it paid $270 million for an oil sands property owned by Newmont Mining (NEM).

In doing so, it’s buying into region that has already attracted the attention of global players that range from France’s Total to Exxon Mobile (XOM) and Royal Dutch Shell (RDS.A). (The interesting story here is who does not have a stake in the oil sands: British Petroleum (BP) is conspicuous in its absence, a legacy of previous management’s views on this play, and China’s state-owned energy entities are also only minor players.)

The Harvest acquisition offers a simple case study on the dynamics of this sector.

Along with conventional oil and gas properties in western Canada, the trust has oil sands holdings in two areas: Alberta’s Peace River and Cold Lake regions. It would be logical to expect deep-pocketed KNOC to bulk up in both parts of the province, with further acquisitions or partnerships.

All it takes is a glance at Alberta government-supplied maps of these two areas to figure out who else intends to play the energy acquisition game, and who might get picked off.

Royal Dutch Shell, a serial acquirer, dominates the Peace River oil sands. Smaller players in this patch of the province include Baytex Energy Trust (BTE) and Penn West Energy Trust (PWE).

Now, this is not a prediction that those two relatively large trusts are going to be taken out in the near future. But the trend is not their friend. Like Harvest Energy, both Baytex and Penn West have no controlling shareholder, and both face the prospect of losing luster as they convert to traditional common stock companies.

Move to Cold Lake, and once again, the global energy giants have staked claims, and there are smaller domestic companies in the mix. Imperial Oil, the domestic arm of Exxon Mobile, has a massive stake, along with Royal Dutch Shell.

At the other end of the spectrum is Bonavista Energy Trust (BNPUF.PK), with five separate properties in the Cold Lake region, and one of the largest independent domestic energy companies, Canadian Natural Resources (CNQ), with 26 properties in the area.

Comments

[Mad Hedge F...:]

ndyu Anyone who has any illusions about the Canadian tar sands business should take a look at the March issue of National Geographic, not normally a prime source of financial and economic news for me. I’m not normally a big time environmentalist, but just looking at the glossy, eye opening pictures tells you that this is this an ecodisaster of Biblical proportions. A $50 billion investment by several firms over the last decade is now producing 750,000 barrels/day, and another $100 billion was headed north before prices crashed last year. You have to cut down a whole forest, remove two tons of peat, then another two tons of sand, and burn 100 barrels of oil equivalent to heat rivers of water to steam, just to produce a single barrel of oil. This gives you the world’s highest production cost, thought to be $80-$100/barrel. There are now 50 square miles of sludge ponds in Northern Alberta leaching a witch’s brew of poisons into the water supply, which has caused the local cancer rate to explode tenfold. We’re not just talking about a few sick ducks and fish here. Canada is the largest foreign supplier of oil to the US, accounting for 19% of the total, and half of that is coming from tar sands. One can only assume that the whole industry was built as a hedge against some Third World War, Armageddon type total cut off of all foreign crude supplies that would drive prices to $500/barrel, making all of this hugely profitable. Maybe the owners think they can get away with this because it is in the middle of nowhere. An army of lawyers about to hit these projects with a tidal wave of litigation think otherwise. After looking at these pictures and analyzing the numbers, you have to ask if it is really worth it, just so I can drive my Hummer to Walmart.

Oct 22 12:36 PM

[neptune:]

Hey mister "I'm not a big time environmentalist", you sure use all the eco-words, including "tar sands". Not all oil sands require the efforts you suggest. You do not give any solutions for the coming Armageddon of energy crises that
will hit the world soon enough. I am sure you drive to work in some internal combustion engine. Yes, let's get all the "clean" oil from the Arabs and other unfriendly countries,
so they can hold a gun to our collective heads, when you want to fill your gas tank. Your exaggerations on the efforts, costs and eco-impact is typically outrageous.

Oct 22 01:03 PM

[2651:]

Ecological consideration is important but so too is the true cost of Arab oil, money spent in Canada is not financing muslim extremists.

Oct 22 01:26 PM

[magredoak:]

I'm not sure of the details, but BP traded 1/2 interest in it's Toledo, OH refinery, for interest in Husky Oil's tar sands.

Oct 22 04:27 PM

[longoil:]

KNOC has stated they will try acquire another oil sands property in teh near future but obviously would not state which one.

Judging the stock price jumps today of PWE and BTE (9% and 0.65% respectively), many investors seem to be betting that PWE will be the next target.

Oct 22 05:59 PM

[a. palmer jr.:]

I think it's good for the middle east to have a little competition. It's also good that the middle east can't cut us off from all the crude oil. I do agree that we need to conserve as much as we can so that there will not be more of an ecological disaster wherever we get our oil. We also are doing the right thing by exploring other methods of powering our transportation.

Oct 23 09:44 AM

[long_on_oil:]

Looks like mad_hedge may be trying to short the oil sands companies with that BS post. $80 to $100 a barrell, what a crock, just look at SUncors latest financials and you will see the true costs related to processing oil sands.
My prediction is that BP will end up buying SUncor. That prediction is more reliable than the article posted by mr hedge.

Oct 23 09:49 AM

[oilsands:]

Think outside the box, friends. For sure, we do not want to continue helping the middle eastern Arabs who hate us. Bankrupting ourselves "to use their oil" is incredibly stupid.
Likewise, we do not need to destroy the planet to power our cars and computers. But all the whiners who insist on a single magic bullet to solve all problems keep denying that it is possible. I fear for the future of my grandchildren, both economically and environmentally. I also know that we can provide a much better future for them, but only over the objections of the vested interests who have no interest in the next generation.
Cheap oil is nearly gone. The price is just going up. We need to kick our addiction to petroleum for transport. Think what not buying all that Arab oil would do for our balance sheets.
Besides, the pipeline which China is having constructed from the oils sands processing plant to the port of Vancouver isn't there to provide oil to us. It is there to insure China's future supply. They don't need to own the production, only the transport.
There are hundreds of ways to beat the problem of power without buying Arab oil or despoiling the planet. Only the lazy and selfish deny that. My wife and I are happy to receive our oil checks, and have no fear that they will still arrive when we use natural gas, wind, solar, and hydro for energy we need. The value of oil for producing products will always be high; we do not need to burn it up.

Oct 23 11:19 AM

[Jimbo:]

I subscribed to National Geographic for more than 50 years. In the recent past, a new editorial staff has converted the magazine to a polemical publication. There are several sides to that Tar Sands issue that the Geographic is not presenting. I have not renewed my subscription.

Oct 23 12:51 PM

[jarco:]

Tar Sands investors enjoy their extraordinarily high dividends equal to junk bonds but refuse to recognize the inherent risks.

Oct 23 04:43 PM

[longoil:]

Jimbo,

I agree 100% with you. There many sides to the oil sands developments.

1) They provide secure oil to the USA from neighbors who don't use the proceeds to fund terrorism against the USA and its allies.

2) There are many environmental concerns with the oil sands no doubt. But companies like Syncrude and Suncor have made great strides. The have increased the recycling rate of water used to the point where only 3 barrels or water are needed (instead of the previous 10 barrels) to produce 1 barrel of oil

3) Suncor has developed technology where the reclamation rate of mined oil sands land has decreased from decades to weeks.

www.montrealgazette.co...

4) Oil sands provides countless well paying jobs to people from Eastern Canada that have a experienced high unemployment rate.

Oct 24 11:33 AM

[einstein p ...:]

I have been an advocate of the CANROYS for quite some time and had large holdings in HTE, which I sold at $9.30, which was close to double my entry price. The real question, however, is whether the Canadian government is willing to sell natural resources to foreign companies and whether the deal will be approved. If so, it's probably the start of of several such deals for all forms of natural resources in both Canada and the United States, which is short-sighted and dangerous.

I own PWE, BTE, PGH, as well as several American oil and natural gas trusts. I also own coal stocks.

While I don't mind making a profit on the pending HTE sale, I'm also anticipating buying the stock back at a lower price if the deal does not get approval.

Oct 24 12:30 PM

[longoil:]

In regards to HTE, there is several scenarios that can play out.

1) Approval of shareholders and Canadian government, HTE share price will not go above $10.

2) Non-Approval of either current shareholders or Canadian government, HTE share price will tank to $3 or $4 as KNOC is forced to unload its holdings.

3) Another Asian oil company enters the competition and bids HTE to $15 or $20.

I would say that scenario #1 is the most likely at 60%, scenario #2 is possible at 30% and scenario #2 is the least likley at 10%.

Oct 24 03:30 PM

[Cambrian Ca...:]

A $12 billion investment in the Horizon Project for CNQ is already producing 100,000 barrels per day. With Phase 2 and 3 completed by the middle of next decade, they will be producing about 400k per day--for the subsequent 40 YEARS! I would say that that dynamic should produce an amazing return on your capital.

Most of the steam needed to produce the synthetic crude is currently being powered by natural gas, which is widely available in Canada and given the widening cost/BTU differential between oil and natural gas--much more profitable. I have been to several investment presentations on the manufacturing processes of converting oil sands to bitumen to synthetic crude. These projects are already subject to extensive regulation by the Canadian government, generate substantial tax revenue to the province of Alberta and federally.

In my opinion, the most impressive and comprehensively engineered project was that done by CNQ. Because of the substantial upfront investment, most of the significant oil sands production projects are joint ventures among a number of companies that try to parse responsibility for the range of activities. CNQ is the only company I am aware of that owns 100% of its projects, and the project represents a substantial proportion of the company's activities such that it will become the main driver of its financial performance over time.

Nov 07 03:03 PM