Canada: Oil & Gas Group - Industry Update (June 2010)

As energy-focused companies, firms and state-owned entities continue to eye international energy industry opportunities, McCarthy Tétrault is pleased to provide a brief Oil & Gas Industry Update highlighting recent Canadian market activity and trends including:

• increased M&A activity in Alberta's oil sands, led by foreign acquirers;
• Canadian companies considering HKEX for oil & gas stock listings;
• shale gas is a bright spot in the weak natural gas sector.

Recent Deal Activity

In Canada, we have been experiencing a marked increase in M&A activity, both with Canadian-based majors and with deals involving international independents and state-owned companies:

Company

*McCarthy Tétrault client

Our Perspective

McCarthy Tétrault's Oil & Gas Group observes the following industry challenges, opportunities, and trends through the balance of 2010:

Focus on Asia - Inbound and Outbound

• International investment interest in Alberta oil sands continues, particularly from Asia (e.g., Penn West/CIC deal; PetroChina deal; India; Koreans — KNOC/Harvest deal).

• Widespread view in Alberta that supply/demand equation will result in a longer-term rebound, supported by reserve and output indicators (e.g., Mexico oil output at lowest since 1995, according to Reuters).

• Canada's Kitimat LNG Project — exporting LNG to Asia; promising recent advancement with suppliers and customers.

• Some Canadian oil & gas companies (such as McCarthy Tétrault client Sunshine Oilsands) are eyeing HKEX listings vs.TSX or NYSE listings — we speculate this may be a forward trend.

Domestic Activity – Canada

• Higher oil prices, combined with continuing high international interest in Alberta oil sands, have sparked a new acquisition cycle.

• Majors and joint ventures - CNRL, Cenovus Energy, Husky/BP, ConocoPhillips/Total, Suncor Energy, and Imperial/Exxon - saw project restarts in 2010, ranging from $900 million to $8 billion.

• Natural gas remains weak; one "sweet spot" is shale gas in both Canada and the US - tremendous opportunity.

• Gas prices low; could mirror 2002 and present investor opportunities; some key analysts are predicting mid-term rebound.

Environmental – Area to Watch

While new environmental legislation has not yet substantially impacted E&Ps in Canada, we are watching the outcomes of the following:

• the current $2 billion in Alberta provincial funding to guide carbon capture and storage projects;

• the US approach to energy policy, climate change policy, and new technology investment;

• Canadian companies' analyses of the implications of California's new fuel standard in relation to the oil sands; and

• the potential North America-wide approach to emission reduction targets; this philosophy has support in Canada.

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