Oil Sands Truth: Shut Down the Tar Sands

Suncor's boldest move yet

Suncor's boldest move yet
Claudia Cattaneo, Calgary Bureau Chief, Financial Post
Friday, May 29, 2009

Taking quantum leaps has been the hallmark of Suncor Energy Inc. under the leadership of Richard George.

But Suncor's boldest move yet -- the $19.2-billion takeover of Petro-Canada -- may be approved next week, when shareholders vote on Mr. George's plan to form one of Canada's largest companies and the dominant player in the oil business.

Mr. George is certainly not new to company-changing deals. The first was in 1997, when he announced the Millennium project, a $3.4-billion expansion to double Suncor's core oil sands business in Fort McMurray. That move made it a Canadian oil leader and helped kick-start the oil sands industry.

Then, in 2001, came the $20.6-billion Voyageur suite of oil sands projects, which would double the company once again over the span of a decade. Construction of Voyageur was halted in January -- after $7-billion in spending -- as oil prices fell and access to credit dwindled.

But the global crisis did not stop Suncor from its announcement in March of the takeover of Petro-Canada, its first major acquisition. The deal will make it Canada's largest oil and gas company and the last widely held Canadian integrated oil company. Suncor will also become a dominant player on the Toronto Stock Exchange, with a shot at becoming its most valuable under higher oil prices.

It's expected that when shareholders meet on Thursday at a well-attended annual and special meeting in Calgary, they will once again trust Mr. George to lead them on the right path and give the merger their blessing.

Among the supporters will be Len Racioppo, president of Jarislowsky Fraser Ltd., Suncor's seventh-biggest shareholder, with 22.3 million shares.

"Like any merger, one-plus-one must equal 2.2," said Mr. Racioppo, who is looking forward to the creation of a new Canadian giant. "They should be able to get synergies, better cash-flow growth and, therefore, they should be able to get better growth in the company and the value in the company."

Suncor's all-stock scoop, made at the bottom of the market, could be the only one of significance from the sector to emerge in the global crisis. With oil prices in an upward trend, Mr. George's latest leap could be his best-timed.

In an age when trust in oil executives is low, Mr. George, 58, has loyal followers both inside and outside the company.

"Rick's biggest strength is his ability to communicate across [different] audiences," said one observer. "He motivates people ... to believe in the Suncor story and the vision he's got. That is an incredible ability and people trust him. A lot of CEOs have struggled with that."

When he arrived at Suncor in 1991, and quickly was named CEO, Canada's oil sands pioneer was a wreck. It was one of the world's highest-cost oil producers in a technically challenged and inefficient business. Its oil sands plant in Fort McMurray had suffered a devastating fire and a 5½-month labour dispute.

And the company's chief executive, Tom Thomson, was dying of pancreatic cancer.

In an interview with the Financial Post in 1999, when he was named Canada's Outstanding CEO of the Year after turning the company around, Mr. George, 49 at the time, credited "a combination of great positions and really good strategies and great people to execute them." He added: "I always look for people who are smarter than I am."

The statement is typical of Mr. George, who shuns the spotlight, rides a Harley-Davidson and is known to his staff as "Rick."

Former Suncor director Michael Koerner said Mr. George's straightforward, low-key style has served him well.

"He doesn't play games and takes sensible positions," said Mr. Koerner, who retired about six years ago after 25 years on Suncor's board. "He doesn't want to be on a pedestal as running the biggest [oil] company in Canada, which he will be doing. He is just the same old Rick George, paying attention to his business."

Yet, he's also seen as a leader with a vast field of vision, a man who was talking a decade ago about the need for oil sands companies to be environmentally responsible.

When the Alberta government introduced higher royalties last year, despite industry protests, he quickly cut his best deal, sat beside provincial Energy Minister Mel Knight for a photo op, and moved on.

"Is it a perfect world? No," he said at the time. "Is industry happy about paying more? No. But, I think this strikes that balance with the owners of the resource."

The son of a TV and radio shop owner in Brush, Colorado, a tiny former gold mining town, Mr. George started his oil industry career as a field hand during summer breaks while studying civil engineering at Colorado State University.

In 1973, he joined Texaco as a project engineer. While working during the day, he put himself through law school at night and earned a law degree from the University of Houston in 1977.

He moved to Philadelphia-based Sun Oil Co. in 1980, working primarily on overseas assignments. Before moving to Calgary, he worked in London, heading Sun's North Sea and North Africa operations. Mr. George and his family became Canadian citizens in 1996. He received the Order of Canada in 2007. Yet Mr. George will be challenged to successfully merge Suncor with Petrocan.

Suncor's culture mirrors his style -- entrepreneurial, results-oriented, driven. The company has been supported by a strong board of directors. Petro-Canada's culture continues to reflect its Crown corporation days -- slow-moving, conservative, unmotivated.

Mr. Racioppo ranks marrying the two cultures as the merger's biggest risk.

"You had a company and a management that has worked very, very well," he said, referring to Suncor. "Now you are bringing two together, so there is a change happening. We liked what we had at Suncor. Will we like what we have in the combined entity, management-wise?

"In that regard, you are also most likely changing the culture at Suncor by bringing in two groups of people and trying to put them together, and that's probably the most significant management issue... the most significant issue for us as a Suncor shareholder."

Petro-Canada's culture may be hard to change. A major motivation for the deal was its underperforming stock price, reflecting market disappointment with a succession of missteps, from its on-again, off-again oil sands plans, its unsuccessful attempt to get into the liquefied natural gas business with the Russians to its poor performance in East Coast assets, said Wilf Gobert, one of Canada's senior oil and gas analysts.

Ron Brenneman, CEO of Petro-Canada, who joined the company from Exxon Mobil Corp., may have felt that he had taken Petro-Canada as far as he could and that it needed "a strategic and cultural shock," Mr. Gobert said.

Mr. George's choices about which assets to keep and which to sell will also determine the merger's success.

Suncor's focus on one asset helped the company and boosted its following among shareholders, Mr. Racioppo said. "So, perhaps getting the Petrocan people more focused and tailored-down could be the most significant benefit that happens to Petro-Canada and maybe the management as well."

But Robert Mansell, a professor of economics and academic director of the School of Policy Studies at the University of Calgary, said having a diversified asset base may not be a bad thing for the new Suncor.

"In a world with great uncertainty, where we don't know what is going to happen with climate change policy, it gives you an ability to mix and blend and do all kinds of things that you wouldn't be able to do if you were just oil sands," he said.

"Long term, if you can maintain a very efficient, integrated operation, that is better than a very narrow, specialized operation. And when you are talking about billion-dollar projects, being a large company is a lot better than being a small company. I see that as being an excellent strength that they can build on."

Then there is the vastness of the task at hand. Suncor's previous leaps were within a business it knows better than anybody else. "When you are 90% oil sands, you have to make it good all the time," said Esther Mui, senior vice-president at Dominion Bond Rating Service.

"This time around, it's probably a slower process," Ms. Mui said, "because it's a bigger ship to move."


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