Alberta Energy Company Ltd. History

Address:

#3900, 421 - 7 Avenue S.W.
Calgary, Alberta T2P 4K9
Canada

Telephone: (403) 266-8111
Fax: (403) 231-3687

Public Company
Incorporated: 1973
Employees: 700
Sales: US $664 million (1995)
Stock Exchanges: Toronto Montreal New York
SICs: 1382 Oil & Gas Exploration and Production; 1389 Pipelining; 5052 Petrochemicals

Company History:

Alberta Energy Company Ltd. is the second largest oil and gas producer in Canada. The company's primary activities involve oil and natural gas exploration, development and production, and the ownership and operation of petroleum pipeline systems. In December of 1995, Alberta Energy Company Ltd. paid $1.1 billion to acquire Conwest Exploration Company Ltd., one of the most prominent oil and gas exploration firms in North America. The transaction immediately propelled Alberta Energy to the top of the oil and gas industry, increasing its market capitalization to $2.2 billion. The merger was a boon to Alberta Energy, and increased its exploration land by 56 percent, natural gas reserves by 49 percent, conventional oil reserves by 84 percent, gas production by 55 percent, and conventional oil production by 96 percent. In addition to its expansion on the North American continent, Alberta Energy has made a commitment to pursue exploration and development opportunities in the Neuquen Basin of Argentina, an area with a high potential for significant oil and gas revenues.

Early History

At the height of the OPEC oil embargo during the early 1970s, the government of the province of Alberta, Canada, decided to initiate a capital investment program to lessen the dependence on foreign oil. The government organized a group of managers and executives from the oil and gas exploration industry and proposed to form a new company that would be operated on a for-profit basis by nongovernment personnel. The concept of forming a new oil and gas exploration firm was attractive to a number of the businessmen approached by the Alberta provincial government, and they agreed to organize and manage the company, despite some reservations expressed regarding the volatility of the industry at that time. In September of 1973, the Alberta Energy Company Ltd. was incorporated, and in just two years the firm was fully operational.

Initially, Alberta Energy focused on gas exploration and production as well as conventional oil exploration and production. Operating almost exclusively in the province of Alberta, the company purchased extensive tracts of land in the Berland River area of west-central Alberta and the region around East Peace River Arch, both with potentially high reserves of oil and gas. During the mid- and late 1970s, management decided to diversify its activities to provide a more stable cash flow for company operations, and the company entered the lumber industry to produce fiberboard for the commercial market.

In the early 1980s, however, with the fear of another oil embargo receding into the past, the deregulation of the natural gas industry in Canada, and the highly protectionist attitude of the United States in the area of forest products, the company's revenues began to plummet. Yet the talent and dogged persistence of the company's management team guided it through these trying years. Management successfully renegotiated Alberta Energy Company's gas contracts, established more sensitive market pricing, and confirmed long-term purchasing agreements. As the price for a barrel of crude oil fell, it was offset by the concurrent lower price for petroleum land purchase, and company management began to acquire ever-larger tracts of land in Alberta for exploration and development. In addition, the provincial government of Alberta declared a royalty holiday for new oil production, thereby boosting the profits of new oil discovered by the company during this time. Finally, management implemented a restructuring program that reduced the company's operating expenses by consolidating the responsibilities of staff members, requiring longer work hours of its employees, and initiating a cost-cutting strategy for all oil and gas exploration.

Growth and Expansion in the Late 1980s

The restructuring strategy implemented by Alberta Energy Company's management team was successful beyond its expectations. From 1982 to 1986, the average daily western Canadian gas production at the company increased from 193 to 252 million cubic feet. The average daily western Canadian conventional oil production from 1982 to 1986 increased from 346 to 4,613 barrels. And the company oil and natural gas landholdings during the same time shot up from 2.8 million to 3.2 million acres. By 1986, the company held interest in 2,960 producing gas wells and 265 producing oil wells, almost all of them located in Alberta. During this time, the company acquired the following: Chieftain Development Company, Ltd., a firm involved in the international gas and oil exploration industry; Pan-Alberta Gas Ltd., one of Canada's leading natural gas marketers; and Blue Ridge Lumber Ltd., a softwood lumber plant that Alberta Energy management turned into a leading medium density fiberboard manufacturing operation.

In 1986, the company established a separate operating division for its burgeoning pipeline operation. Earlier, the company had commissioned the building of the Alberta Sands Oil Pipeline, a 270-mile pipeline that delivered oil from a plant located at Fort McMurray to the Edmonton area, where it was distributed to local refineries. Another pipeline, the Cold Lake Heavy Oil Pipeline, provided a transportation network for heavy oil blends from the Primrose/Cold Lake area to Edmonton. The final system to be incorporated into the company's pipeline operating division was the Alberta ethane gathering network, which collected ethane from natural gas processing plants within Alberta and transported it to storage caverns located near Fort Saskatchewan.

By 1989, Albert Energy Company owned more than six million acres of exploratory and development landholdings in Alberta, Saskatchewan, British Columbia, and Beaufort, and ranked as one of the top ten companies in total reserves and in oil and gas production levels in the Western Canadian Sedimentary Basin. One of the major areas of exploration during this time was the Waskahigan/Karr/Gold Creek in west-central Alberta. The company held 330,000 acres of land in the area, which included four exploratory wells and ten development wells. Alberta Energy Company reported 100 billion cubic feet of natural gas reserves and 3.6 million barrels of oil and natural gas liquids in its landholdings. Within one year, management projected that production levels would surpass 18 million cubic feet of gas and 600 barrels of natural gas liquids. Although prices for gas declined by four percent, sales of synthetic and conventional oil increased by more than 20 percent and production was at record levels.

During the same year, Alberta Energy Company, through its 50 percent share in the Pacific Coast Energy Corporation, successfully negotiated with both the Canadian government and the British Columbia provincial government to begin construction of the Vancouver Island Natural Gas Pipeline. With a price tag of more than $280 million, the pipeline would deliver natural gas to Vancouver Island and southwestern British Columbia. Alberta Energy also had an interest in the Iroquois Gas Transmission System, which stretched from Iroquois, Ontario to Long Island, New York. In addition to these new developments, the company completed a major renovation and expansion of its Cold Lake Heavy Oil Pipeline, which operated from northeastern Alberta to Edmonton. One of the innovative aspects of this renovation program included state-of-the-art variable speed pump technology. The company's operation of all the pipeline systems under its control was one of the safest in Canada, and for the third straight year there had been no lost-time mishap.

In the two other sectors of the company's activities, development occurred rapidly. The Blue Ridge Lumber operation reported record shipments of both lumber and medium density fiberboard in 1989, with a high volume of chips sales adding to the firm's profitability. Under Alberta Energy management, Blue Ridge Lumber Ltd. was committed to extensive and continuous reforestation programs, resulting in nearly 8,000 acres of the company's landholdings being seeded for regeneration. The company's petrochemicals divisions, having experienced a short period of depressed prices for nitrogen fertilizer at the beginning of the year, began to see prices rise as the year went on. In its first full year of operating within the continental United States, Alberta Energy Company had established ammonium nitrate subsidiaries in Borger, Texas, in Beatrice, Nebraska, in Early, Iowa, and in Leal, North Dakota.

Development During the 1990s

In the early 1990s, a severe and widespread economic downturn spread throughout Canada, yet Alberta Energy Company weathered these conditions with remarkable success. In 1992, natural gas sales, measured in cubic feet per day, increased by ten percent, and oil and natural gas liquid sales increased by 12 percent. Because of the company's astute management, especially in the areas of oil and gas production and lumber operations, net earnings rose an impressive 206 percent. Much of this increase was due to strict cost controls, which resulted in a nominal increase of only one percent in operating expenses for 1992. For example, the company's funding and development costs were drastically reduced during the early 1990s. From 1988 to 1990, exploration and development costs amounted to $15.20 per barrel; by 1992, exploration and development costs amounted to $6.40 per barrel.

In 1992, the sources of Alberta Energy Company's operating income were a combination of natural gas, conventional oil, lumber, and pipeline revenues. Surprisingly, during this time, the largest generator of revenue was the company's strong pipeline operation. In 1992, Alberta Energy Company wholly owned and operated approximately 820 miles of crude oil pipelines and had a one-third interest in a highly successful 550-mile ethane gathering system in the province of Alberta. In addition, the company still owned a one-half interest in a natural gas pipeline to Vancouver Island. To expand its activities in this area and continue to reduce operating costs, the company began negotiating with a potential Japanese partner to commercialize its "transoil" technology, an innovative technique that uses water to pipeline heavy oil, rather than the traditional oil-based diluent.

1995 was one of the best years for Alberta Energy Company. The company's exploration and development program, the largest to date in more than ten years, resulted in 235 new wells, including 44 that were explorational and 191 that were developmental, with an astounding success rate of 84 percent. Conventional oil production during 1995 increased by 36 percent, primarily as a result of new drilling successes at the company's Suffield and Ogsten sites. Total liquids production increased by a total of 15 percent, more than 42,000 barrels per day. Although the company maintained and expanded its pipeline network throughout Alberta, as well as other smaller investments, management decided to sell the forest products and lumber operation and its associated fiberboard manufacturing facilities. This allowed Alberta Energy Company to lessen its debt and to garner its financial resources for long-range opportunities.

One of these opportunities involved the expansion of exploration and development operations into South America. During 1995, the company invested $16 million in the acquisition of properties near the undeveloped Neuquen Basin of Argentina. This brought Alberta Energy Company's holding in that country to nearly 500,000 acres, with a 23-square mile region high in potential for oil and gas recovery. Because of lack of investment capital over the years, oil and gas exploration and development in Argentina lagged 20 to 30 years behind the rest of the world. As a result, management at Alberta Energy Company made a commitment to devote up to ten percent of its total budget for oil and gas exploration and development to its Argentinean endeavor. One of the new technologies that the company hoped would yield large tracts of oil was the horizontal drilling method used so successfully in Western Canada.

The most important transaction in the company's history, however, involved the acquisition of Conwest Exploration Company Limited for $1.1 billion. One of the most prominent and successful oil and gas exploration companies in North America, Conwest was primarily operating in the West Peace River Arch region of Alberta province. The merger, a friendly transaction, created the second largest publicly traded oil and gas exploration company on the Canadian stock exchanges. More important, the merger dramatically increased Alberta Energy Company's exploration land, natural gas reserves, conventional oil reserves, gas production, and conventional oil production. With the acquisition of Conwest, the company's stock price shot up 22 percent during 1995.

Given the volatility of the oil and gas exploration industry, Alberta Energy Company's purchase of Conwest and its assets provided the long-term stability that management sought. Having sold all of its non-oil and gas business, the company was ready, and possessed the resources, to focus exclusively on oil and gas exploration.

Principal Subsidiaries: A.E.C. Argentina S.A.; AEC Energy Resources Ltd.; AEC Power Ltd. (66.7%); Alberta Oil Sands Pipeline Ltd.; Alenco Gas Services Inc.; Alenco Inc.; Alenco Iroquois Pipelines Inc.; Alenco Pipelines Inc.; Alenco Resources Inc.; Conwest Exploration Company Limited; Express Pipeline Inc.; Express Pipeline Ltd. (50%); Pan-Alberta Resources Inc. (49.9%); Stealth Resources Limited.

Alberta Energy Company Ltd. History

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