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Suncor, Petro-Canada Merger to Create Canada's Largest Energy Company

Suncor Energy Inc. and Petro-Canada on Monday announced plans to merge in an all-share transaction worth about C$19.6 billion (US$15.5 billion), which would create Canada's largest energy company. Besides building its stake in Canadian oilsands, the combination creates a small powerhouse of natural gas prospects in Western Canada, the U.S. Rocky Mountains, the Mackenzie Delta and Alaska.

The transaction, which includes around C$2.66 billion in assumed debt, would give Suncor's shareholders 60% of the merged company, which would operate under the Suncor name. Petro-Canada's shareholders would hold 40% of the company, receiving around 1.28 common shares of the merged company for each Petro-Canada common share they own; Suncor's shareholders would receive one share of the new company for each share of Suncor they own.

The merger is the largest in the global oilpatch since 2008, when Norway's Statoil acquired Norsk Hydro for $29 billion.

"We're in a period here where financial uncertainty is very high on a worldwide basis," said Suncor CEO Rick George, who will lead the new company. "We have big-time volatility of commodity prices and there's no assurance of where we go from here..." George and Petro-Canada CEO Ron Brenneman, who will assume the mantle of executive vice chairman, hosted a conference call with financial analysts and the media on Monday.

George told analysts, "We're going to invest in the lowest-risk, highest-return capital projects." The merger "creates a 'made-in-Canada' energy leader with the assets, cost structure and financial strength to compete globally."

"The super majors, particularly Exxon and Shell, can invest through the bottom part of the cycle and are improving their position in Canada," George said. "We at Suncor had two options...we could kind of pull back" in capital spending, "which we obviously did...or do something that would really strengthen our position and allow us to look at investing and coming out of this cycle stronger than ever."

Merging with Petro-Canada "is something that's going to accomplish this," said George. "It will be the fifth-largest oil company in North America and it will be one that can compete on many fronts."

Combined, the merged companies would achieve C$300 million in operating synergies and an additional $1 billion in capital synergies by sharing infrastructure. "Some near-term job reductions" would be done to achieve operational synergies, but the deal also could create other jobs with more investments, George said.

"We expect increased investment, particularly in Canada, which will actually create more construction jobs near-term, more operating jobs in the mid to long term and wealth creation in Canada in terms of investment employment and taxes paid," George said.

Suncor is considered by some to be strictly an oilsands producer, but it also develops gas projects throughout western and central Alberta and in northeastern British Columbia. Besides its Panther leasehold southwest of Sundre, AB, Suncor also operates gas wells and production facilities in the Stolberg area in the Foothills of western Alberta, including around Brown Creek.

Suncor also operates gas wells north and northwest of Edson, AB, and in 2005 Suncor and ConocoPhillips Canada built a gas pipe from the Cabin Creek gas field to the Simonette gas plant near Valleyview, AB, to accommodate area gas volumes. Suncor also has begun production around the Fort St. John, BC, area, and it is currently under way on a pipeline project in Gwillim, south of Fort St. John.

In 2007 Suncor's total gas output reached 215 MMcf/d, enough to offset energy consumption at its oilsands and refining operations and to provide a surplus of sales to the North American market.

Petro-Canada, which has assets spread across the globe, has long been a major North American gas explorer, and it also markets natural gas in North America. In 2006 Petro-Canada's North American operations produced 616 MMcf/d of natural gas (102,700 boe/d) and 14,200 b/d of crude oil and natural gas liquids. And by 2010 Petro-Canada was targeting 50% of its total production to come from unconventional resources. In addition, Petro-Canada and TransCanada continue to work on plans for the Cacouna Energy Project, a liquefied natural gas regasification plant to be built in at Gros-Cacouna, QB.

Before the merger is completed, the companies will have to maneuver their way around the Petro-Canada Public Participation Act. Petro-Canada was created as a federal Crown corporation in 1975 as a tool to develop the domestic oil and natural gas industry and to take over the federal interest in Syncrude, which still manages one of the oldest oilsands developments. The government began to privatize the company in 1991, and it sold its last stake in the company in 2004, but ownership stakes remain (see Daily GPI, Sept. 30, 2004). By structuring the deal as a merger, the companies expect to avoid any complications with the legacy federal legislation.

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