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Connacher Oil & Gas failed to operate independently in the oilsands

The oilsands is no country for old oilmen and junior companies.

If you need further proof that the oilsands is a big boys’ game, consider the sad tale of Connacher Oil and Gas. In 2004 it acquired underground oilsands leases south of Fort McMurray. Founder and CEO Richard Gusella, an old-school iconoclast who’d been through the oilpatch’s booms and busts, fashioned a strategy to build the company in increments, one 10,000-barrel-per-day SAGD (steam-assisted gravity drainage) plant at a time. 

He wanted to make Connacher immune to the changes in circumstances peculiar to the energy sector. It would acquire natural gas wells to hedge against a spike in gas prices (unnecessary, as it turned out). It bought a small refinery in Great Falls, Mont., to hedge against a huge spread between bitumen and synthetic crude oil prices. It built one state-of-the-art plant, Great Divide, and had plans for more. It was a virtually if not literally integrated oil and gas company—on a shoestring.

One risk Connacher couldn’t protect itself from was excessive indebtedness. Indeed, Gusella piled on debt rather than cede control of the company. As any businessperson will tell you these days, debt is cheap for those who can afford it right now, but much more expensive for those who can’t.

After barely surviving the financial crisis of 2008-09 and failing to find a suitable joint-venture partner, Gusella’s number came up this week. In December, the company had received an unsolicited takeover offer from an unnamed buyer, which Gusella refused. Then in early January he fired three senior executives, evidently over disagreements on direction. Finally he stepped down on Jan. 12—not just as CEO but as a director too, leaving the company rudderless and in play. And this when oil prices are high.

Likely Connacher will go the way of Opti Canada, UTS Energy and Synenco Energy, junior companies ultimately not up to the task of operating even portions of oilsands projects. If there is a role for junior companies in this business, it is in identifying reserves and developing new technology for extracting oilsands and licensing that technology (see Laricina Energy, Osum Oil Sands, Petrobank Energy and Resources, E-T Energy). Even then, most will eventually be bought out. But the business of actually producing oil for profit in the oilsands was and still is a task for majors and others with deep pockets.

Can a junior company develop and operate a commercial oilsands project on its own? The answer is still no.