Major Oil Kicks Off "King of the Canadian Oilpatch" Contest

Canadian oil sands, filled with 173 billion barrels of hard-to-reach oil, are quickly becoming the staging ground for the world's largest oilpatch wrestling match. You'd think the $100 drop in oil prices, which caused companies to cut capital spending and delay projects, coupled with the threat of stricter environmental regulations and the costly process of retrieving the oil, would make Canada's oil sands the last place to look for an investment. The economic scenario playing out these past seven months has created the perfect smash-and-grab opportunity for major oil companies loaded with cash.

Canadian oil sands enjoyed massive project development back in July when the price of oil was hitting record highs. But even then, extracting oil from Alberta's tar sands -- a murky mix of 10 percent bitumen and 90 percent sand, clay and water -- was a tricky, expensive and environmentally messy endeavor. Now, oil sands developers including Suncor Energy and Petro-Canada have cancelled more than $80 billion of their plans. Industry analysts say oil prices need to reach at $80 a barrel to justify starting new projects.

Oil sands developers have seen their market value drop considerably as a result of the economic slump, leaving major oil companies like Total, BP and Exxon poised to take advantage of cheap stock prices. Total has already kicked off the buying spree with its recent hostile bid for UTS Energy, a partner with Petro-Canada in the stalled Fort Hills oil sands project. Total would gain a 20 percent stake in the Petro-Canada run project with its acquisition of UTS and is expected to buy Teck Cominco's 20 percent stake as well.

Then there's Suncor, with its drop in market value to $23 billion. Suncor's has an established production of 200,000 barrels a day, making it a less risky purchase for companies looking to increase its share in the oil sands business.

BP CEO Tony Hayward has insisted the company will continue its exploration and development spending. BP is already involved in the oil sands with its Husky Energy joint venture. There also is some speculation that Anne Drinkwater, a BP up-and-comer, was appointed to run its Canadian operation in an effort to build up the British company's oil sands business.

Cash-rich Exxon, which already owns a stake in the Kearls Lake oil sands project in northern Alberta, has made similar capital spending promises, leading to speculation of an impending acquisition.

The potential hiccup for major oil is the increasing environmental pressure on oil sands development. Environmental awareness campaigns against oil sands development have circulated recently including a full-page ad in USA Today, in anticipation of President Obama's visit to Canada this week. There's no doubt stricter environmental guidelines will make oil sands development more costly. On the heels of new environmental rules, look for oil sands companies to sell off more of its stakes -- likely for a bargain -- as the cost of development and continued tight credit markets outweighs their financial capabilities.