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PETROLEUM
November 5, 2001 Issue Full Text
U.S. cash revitalizes Canadians’ urgent search for natural gas
by Mike Byfield
SO far this year, American firms have spent US$17 billion to acquire Canadian petroleum producers. By any standard, this is serious money. For example, Exxon Mobil-the world’s largest petroleum producer outside The Organization of Petroleum Exporting Countries (OPEC)-has an annual capital and exploration budget in the neighbourhood of US$11 billion. The Yankees’ latest corporate trophy was Canadian Hunter Exploration, snapped up in early October for C$3.3 billion by Burlington Resources. In September, two other Canadian flagships-Westcoast Energy and Anderson Exploration-got gobbled by Duke Energy and Devon Energy respectively, at a combined price tag just shy of US$10 billion. American investment is driven by the probability of higher natural gas prices in the near future, a sobering thought for Canadian consumers.
Stephen Rodrigues, a statistician with the Canadian Association of Petroleum Producers, says U.S. ownership of the oil and gas industry was more than 70% in the 1970s. The next two decades were dogged by government intervention and low fuel prices, which prompted the Yanks to pull back. In their place flourished a flock of Canadian independents, with names like Chauvco, Berkley and Encal. Some of these firms have now in turn been purchased by foreigners. The CanHunter buy pushes the U.S. stake in the industry back above 50%. Gord Currie, an analyst with Canaccord Capital Corp. in Calgary, believes that the American buyers are anticipating a strong rebound in natural gas prices and hence want a sturdy position in gas-prone western Canada.
Far from weakening the Canadian-owned sector, however, the acquisitions have put millions into the pockets of its most aggressive energy entrepreneurs. These executives are now organizing new companies to get back into the game. A recent example is Duvernay Oil, founded by several principals from Berkley Petroleum. Anadarko Petroleum paid $1.14 billion for Berkley last February. Duvernay has been grubstaked with $66.5 million, including $28 million contributed by the five-member firm’s own executives.
The same story is echoed elsewhere. Last year Renaissance Energy was bought by Hong Kong-controlled Husky for $4 billion. Now Renaissance co-founder Clayton Woitas is running Profico Energy Management, capitalized with $20 million. After Hunt Oil purchased Newport Petroleum for $489 million in 2000, former boss Uldis Upitis invested $22 million in a new outfit named Sentra Resources. These new companies are mostly privately held by professional industry insiders. Their equity will give them several years to develop properties without worryimg.
In the past, many Canadian junior producers raised capital through public share issues. But speculative and institutional investors alike were hammered by low gas prices through much of the 1990s, and have since refused to risk fresh capital on smaller players. Now the junior sector is reviving dramatically in private form, thanks to those American acquisition dollars. “The rate of formation of new companies in this industry is remarkable,” comments Greg Gilbertson, a spokesman for the Alberta Energy and Utilities Board (EUB). “Since 1998, 317 new exploration and development firms have registered with us, including 79 between January and September this year.”
After peaking last winter at $12 per gigajoule, Alberta spot prices for natural gas have settled back to less than $3 this fall. Factors dampening prices include plentiful gas in underground storage, moderate weather this summer and slowing industrial demand due to recession and fuel switching. The lower gas price tickles many Canadian oil patchers. “The Americans bought at the peak of the demand cycle,” says the president of one Calgary-based junior. “With gas prices now down again, outfits like Duke and Anadarko will likely cull through their new acquisitions and sell off properties which they consider less attractive. In that case, Canadian juniors will have a good shot at building up their own production all over again. As long as exploration land is available at affordable prices, we’ve always been better at finding oil and gas on our own turf than the big American companies.”
The gas price decline, which is expected to hold bills down through this winter, is obviously good news for consumers. Atco Gas, for instance, just announced that its annualized gas charge will drop from $5.41 per gigajoule to $3.45 in southern Alberta. But the longer term outlook remains fraught with the risk of continental shortages. Canada is producing 6.2 trillion cubic feet per year, a rate that drillers cannot match. The EUB expects Alberta’s gas production to start declining by 2% annually after 2003. Arctic gas, when it eventually becomes available, will cost considerably more.