The Canadian oil sands’ 180 billion barrels of oil reserves are second only to the reserves of Saudi Arabia. Canada is definitely much more geopolitically stable than the Middle East and Nigeria, and its reserves are not in post-Peak, as are the likes of Mexico or Saudi Arabia. This region has large potential for future oil production.

Some of the opposing arguments to the Canadian oil sands are that they are less economical to produce than conventional crude oil. This is very true, but we have already picked the low-hanging fruit in the world of oil. We are left with oil sands, deepsea production, CTL and GTL substitutes.

The Canadian oil sands are going to be a vital supply to the U.S. and the world, and it makes a whole lot of sense for local oil companies to head north of the border in order to get their hands on as much of the oil sands as possible. But, they missed the boat.

On April 27, Statoil, a Norwegian gas and oil company, climbed aboard the oil sands train when it bought out the privately owned North American Oil Sands Corp. (NAOSC) in a deal that fell just short of $2 billion.

Statoil received 257,200 acres of oil sands leases in the Athabasca region of Alberta. The leases hold oil reserves estimated to be around 2.2 billion barrels. By the end of 2009, a pilot project is expected to be implemented to produce 10,000 barrels per day. By the end of the next decade, Statoil believes that it will have 100,000 barrels per day of production from this buyout.

Just how bad did Statoil want this deal to work? There was a private placement of NAOSC shares issued in December at C$13.50. Statoil paid C$20 per share in April. Many investors thought Statoil overpaid, as its share price dropped on the news, but I believe that this Norwegian gas and oil company is looking far beyond $70 oil.

But Statoil isn’t the only, or the first, foreign prospect looking to grasp a piece of the Canadian oil sands.

In 2004, Enbridge Inc. put into plans the construction of an oil pipeline from Edmonton, Alberta, to the coast of British Columbia. Enbridge also announced that a Chinese company was taking a 49% stake in the operation and that the majority of oil will go to China. This pipeline is projected to carry approximately 20% of ALL oil sands production by 2010.

China has also taken minority stakes in four other smaller oil sands producers. This is an interesting strategy. The Chinese do not want to create controversy or be in the headlines. They would much rather subtly get their oil and be on their way. There are 180 billion barrels of oil reserves. With more production coming online every year, China is set to grab 20% of it, and nobody really knows.

These small Canadian oil sands producers are getting bought out left and right. It only makes sense. You have 180 billion barrels of proven oil reserves. You have one of the most geopolitically friendly areas on this earth, and you have a world where conventional oil is starting to run out. Nations everywhere are in the process of trying to get their hands on as much oil as possible.

We have only seen the tip of the iceberg for M&A activity in the market for Canadian oil sands producers. It doesn’t matter where the buyers come from, because these juniors are without prejudice when it comes to payday.

There is one particular company that stands out as a potential buyout target, Oilsands Quest Inc. (BQI: AMEX). On July 12, BQI released a report saying that it had resource potential in excess of 10 billion barrels of bitumen on its properties. Since the report was released, BQI’s share price has increased nearly 60%. That’s just a start…

BQI has 250 million outstanding shares on a fully diluted basis, of which management owns 19%.

Since, Marathon just paid $2.24 per barrel of bitumen reserves in its buyout of Western Oil Sands, let’s be conservative and value BQI’s reserves at $1. That would give us a share price of nearly $40.

I realize that this is a very big number with BQI’s share price currently trading around $4.20. But it is reasonable to think that it could get a bid at $20 with the buyer paying 50 cents per barrel. And what if more than one buyer comes in and starts bidding at BQI? Anyway you look at it, these guys could very easily end up in the sights of China, Norway or even the U.S.

There will surely be more M&A activity in the Canadian oil sands. So we’ll certainly keep an eye out to see where this oil goes.

Sincerely,
Nick Jones
August 2, 2007

Investing in Foreign Oil was originally featured in the Penny Sleuth.