Suncor, Petro-Canada to Merge

Two of Canada's biggest oil companies announced they plan to merge: Suncor Energy and Petro-Canada. The new entity will operate under the Suncor name, but will keep the Petro-Canada brand name for refined products.

"This merger creates a made-in-Canada energy leader with the assets, cost structure and financial strength to compete globally," said Rick George, who is president and chief executive officer of Suncor and who will assume the same role with the merged entity. "The combined portfolio boasts the largest oil sands resource position, a strong Canadian downstream brand, solid conventional exploration and production assets, and low-cost production from Canada's east coast and internationally."

The combined company would be the largest oil company in Canada and have a market capitalization of about $38 billion, reports the Associated Press - much smaller than global giants such as ExxonMobil and ConocoPhillips, with market capitalizations of $326.6 billion and $55.97 billion respectively.

But the merger will give the new company the benefits of some economies of scale. The merging companies estimate they will save more than $300 million (Canadian) in annual operating expenditures, resulting from efficiencies in overlapping operations, streamlining business practices, and improved logistics. The companies also expect to achieve annual capital efficiencies of approximately $1 billion (Candadian) through elimination of redundant spending and targeting capital budgets to high-return, near term projects.

"The merger will be good for shareholders of both companies with reduced capital requirements, operating efficiencies and complementary integration opportunities between upstream and downstream assets," said Ron Brenneman, who is currently president and chief executive officer of Petro-Canada and who will assume the role of executive vice chairman in the merged company. "The increased scale provides more stability in volatile markets, plus the financial and organizational capability to successfully take on large-scale projects in the future."

But the merger may not be enough to fix the problem, writes Keith Johnson in the Wall Street Journal's environmental blog. "At first glance, it doesn't look like the marriage between two of Canada's biggest oil players will address the fundamental problem in accelerating oil-sands development: It's just too expensive at current crude prices. It also doesn't address the uncertainty around how climate-change legislation might impact the economics of this carbon-heavy fuel."

Suncor and Petro-Canada anticipate that the proposed merger will be completed in the third quarter of 2009.