KNOC-Harvest Energy Deal: Prospects for Canadian Oil Sands Rise With Crude Prices

(MoneyWatch)  Canadian oil sands lingered in the industry's version of purgatory earlier this year -- handicapped by a combination of low crude prices and high operating costs. That dim view is brightening, however, as foreign oil companies -- encouraged by crude prices above $75 a barrel and falling costs -- are starting to buy up oil sands assets.

The acquisition and investment floodgates may not be wide open. But the deals are beginning to trickle in. State-run Korea National Oil Corp. agreed Wednesday to buy Calgary-based Harvest Energy Trust for up to $3.9 billion, which includes $2.1 billion of debt. The bid represents a 37 percent premium over Harvest's closing share price Wednesday on the Toronto Stock Exchange.

The latter part of 2009 has seen a number of oil sands deals. Suncor Energy completed its merger with Petro-Canada in August for about $15 billion -- creating Canada's largest integrated oil company with a market value of more than $43.3 billion.

And PetroChina bought a 60 percent interest in Athabasca Oil Sands Corp.'s MacKay River and Dover oil sands projects for $1.7 billion.

In fact, 318 of Canadian energy takeovers totaling $50.5 billion have been announced since the beginning of the year, according to Bloomberg data.

ASOC's chairman Bill Gallacher framed the current state of the oil sands business perfectly in a statement released at the time the PetroChina joint venture was announced in August.

"Oil sands projects are very capital-intensive long-term investments and difficult to fully finance in the traditional equity market."

So, expect more joint ventures in larger projects and outright acquisitions like the Harvest Energy deal. The question is which country and company will be involved next?

Once KNOC settles into its recent purchase, it may look to increase its the oil sands holdings. The company has indicated that it plans more acqusitions in the future as part of its oil stockpiling projects.

Korea is one of the world's largest importers of crude and its appetite for oil hasn't dropped off. The country consumed 516.9 million barrels of oil equivalent from January to August 2009, a 1.6 percent increase compared to the same period last year.

As a result, Korea has been on the hunt to secure oil and gas assets or secure supply deals, like Korea Gas Corp.'s agreement last year to a $90 billion deal with Russia's Gazprom to import up to 10 billion cubic meters of gas a year.

The country's first foray into Canadian oil sands was in its 2006 purchase of the BlackGold oil sands project in northern Alberta from Newmont Mining Co. It would make sense for KNOC to at least take a look at other small companies that operate around Harvest's oil sands holdings.

Andrew Willis over at the Globe and Mail examined Harvest's oil sands holdings in Alberta's Peace River and Cold Lake regions. He notes that Royal Dutch Shell dominates the Peace River area. The small guys in Peace River include Baytex Energy Trust and Penn West Energy Trust. Take a look at this handy map of Alberta's oil sands projects -- posted by Willis -- for a glimpse at whose operating in the Peace River and Cold Lake regions.

Image of Athabasca oil sands painting by Flickr user jmegjmeg, CC 2.0