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If Suncor sells foreign assets, will China buy?

If Suncor sells foreign assets, will China buy?
April 8, 2009

Suncor Energy Inc. SU-T will likely create a "fortress North America" if it completes its $19-billion merger with Petro-Canada, jettisoning international assets to hungry buyers such as China as it focuses on the oil sands, natural gas and East Coast offshore oil.

Petro-Canada's base is domestic, but under chief executive officer Ron Brenneman it pursued various international forays such as Libya and Syria. Investors such as the Ontario Teachers' Pension Plan view these assets as high cost and low return. A foreign-asset sale could net several billion dollars - cash that could be quickly deployed in Fort McMurray on recently shelved oil sands projects, just as costs to build in northeastern Alberta decline because of the recession.

"I think Libya is gone. I think Syria is gone," said William Lacey, a managing director at FirstEnergy Capital in Calgary. "And I think CNPC [China National Petroleum Corp.] is a very logical bidder. CNPC is looking at long-term security of supply. China has one thing a lot of people don't: Cash."

The South China Morning Post in Hong Kong, citing unnamed sources, this week reported that CNPC wants to buy Petrocan's Libya and Syria holdings for $5-billion. The price is considered high by most analysts but CNPC and other state-owned energy firms in China have been active in recent years, and this year, scooping up properties in regions such as Africa.

In February, CNPC bid $499-million for Calgary-based Verenex Energy Inc., which operates in Libya, but CNPC lost as Libya's national oil company plans to use a right of first refusal to buy Verenex.

Mr. Lacey sees Suncor and its CEO, Rick George, establishing a "fortress North America" once the Petrocan deal goes through. That's what happened when EnCana Corp. was formed in Calgary's last mega-merger, between Alberta Energy Co. and PanCanadian Petroleum in 2002. EnCana CEO Gwyn Morgan and chairman David O'Brien then proceeded to sell the combined company's positions overseas - including a huge oil discovery in the North Sea - to focus solely on North America natural gas and the oil sands, a strategy that has been a success.

Suncor and Petrocan shareholders vote on the merger June 4. Suncor hasn't made decisions about what it would do with Petrocan's holdings. But it has said the main focus would be on the oil sands, the heart of Suncor's expertise, and using cash from low-cost, highly profitable assets such as Petrocan's stakes in all three producing offshore Newfoundland oil facilities to expand in Alberta.

"What the future shape of the company may be - that's way in the future to decide that," said Suncor spokesman Brad Bellows. "We have been clear that for projects we move ahead with, we're going to prioritize those with the best cash flow, best return on capita, and lowest risk."

Mr. Bellows and Suncor do not speak specifically about Petrocan's holdings. But based on the three criteria Mr. Bellows outlined, Libya and Syria do not rank high on the list.

In Syria, Petrocan is spending $1-billion to start producing 80 million cubic feet of gas a day in 2010, a very expensive project for a small amount of gas, the equivalent of just 13,300 barrels of oil a day - never mind that it is a volatile region of the world.

In Libya, Petrocan, working with the state oil company, produces about 50,000 barrels a day and plans to double that to 100,000 by spending $3.5-billion. That's also an expensive project and roughly the same amount Suncor would spend to expand its Firebag oil sands operation, a plan that was put on hold in January.

Mr. Lacey said another likely sale would be Petrocan's assets in Trinidad, where it produces natural gas, the equivalent of about 12,000 barrels a day of oil.

The jewel of Petrocan's international holdings is its 30-per-cent stake in the successful Buzzard field in the North Sea, which produces 60,000 barrels a day for the company.


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