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Suncor Energy Inc. is planning a takeover bid for Petro-Canada in a deal that would mark the final chapter of independence for the former state-owned oil company.

Industry sources in Calgary said that Petro-Canada was expected to make a major announcement today. The Wall Street Journal reported that Calgary-based Suncor, the No. 3 domestic oil company by stock market value, would offer about $18-billion in stock for its rival. Spokesmen for the two companies did not return calls.

The deal would create a new champion in the Canadian oil patch and unite two of the biggest players in the oil sands of northern Alberta, provided the companies can stickhandle their way around federal legislation that was once thought to make Petro-Canada immune to a takeover. Under the Petro-Canada Public Participation Act, no person or company can own or control more than 20 per cent of the company's voting shares and the head office must remain in Calgary.

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Petro-Canada has been under increasing pressure from shareholders unhappy with its performance and with the ballooning costs at expansion projects such as Fort Hills, the centrepiece of the company's oil sands strategy. Last month, the Ontario Teachers' Pension Plan disclosed that it had acquired 3.3 per cent of the company and was in talks with management on how to give life to its lacklustre share price.

Suncor is one of only a handful of domestic energy companies large enough to swallow Petrocan, and is among the most experienced firms in the world at running technologically complex oil sands projects. It completed its first oil sands plant in 1967, decades before energy companies from around the world began investing billions of dollars to claim land and extract some of the estimated 173-billion barrels of recoverable oil in the region.

The merger "makes a lot sense," said Greg Boland, chief executive officer of West Face Capital, a Toronto investment firm that is a major Petro-Canada shareholder. "It's just that nobody thought it would happen because of the Petro-Canada Act."

Suncor could potentially get around the law by appealing to the federal government for a change to the ownership rule, or by structuring the deal as a reverse takeover in which, legally speaking, Petro-Canada would be taking over Suncor, Mr. Boland said.

After watching several industry-leading Canadian companies, including Alcan Inc., Inco Ltd. and Falconbridge Ltd., get taken over by foreign interests, Ottawa might be receptive to a domestic merger that would create a new national champion in the oil patch. The federal government was openly supportive of the 2002 union between two large Calgary energy companies, PanCanadian Energy Corp. and Alberta Energy Co. Ltd., that created EnCana Corp. - although neither of those companies had the federal lineage that Petro-Canada does.

"You could create the story of the great Canadian company," said one Calgary investment banker who spoke on condition of anonymity.

Mr. Boland said: "There's no particular reason why Petro-Canada gas stations are any more nationalistic than Suncor gas stations."

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Suncor and Petro-Canada have already come close to a deal once before. A few years ago, Suncor reached an advance stage of negotiations with Petro-Canada, according to a banker involved in those talks.

But the deal was scuttled because the federal government refused to provide assurances that it would move quickly to revoke or amend the act. Another source said there were other obstacles that derailed that effort as well, though he was not specific.

But another financier in Calgary said the takeover might create an "awkward" situation for the Harper government because other potential suitors have approached Petro-Canada in the past. "How is the government saying, we'll take these guys [Suncor]and not anyone else?" he said. "There are a bunch of other companies who covet those assets."

EnCana and Imperial Oil Ltd. are the only two Canadian oil companies larger than Suncor and both have extensive operations in the Athabasca region. However, any move by Imperial on Petro-Canada risks being attacked as a foreign takeover in disguise because it is controlled by ExxonMobil Corp. of Irving, Tex.

Petro-Canada was created as a federal Crown corporation in 1975 by the Pierre Trudeau government as a tool to develop the domestic oil and gas industry and to take over the federal interest in Syncrude, a consortium that still manages one of the oldest oil sands developments. The government of Brian Mulroney began to privatize it in 1991.

Ottawa sold its last remaining stake in 2004, but the ownership limits remained. Petro-Canada operates around the world, including Libya, Trinidad and Tobago, and Syria.

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***

Short history

1975: Parliament passes the Petro-Canada Act, establishing a Crown corporation to create a Canadian presence in the oil industry and hunt for new resources. It takes over federal interests in Syncrude and Panarctic Oils.

1976: Petro-Canada buys U.S.-owned Atlantic Richfield Canada.

1980: Drills its first offshore wells, off Labrador.

1981: Acquires Belgian-owned Petrofina Canada.

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1982: Discovers oil at Valhalla, Alta., the biggest new oil field of the 1980s in Western Canada.

1983: Buys British-owned BP Canada.

1984: The new Conservative government tells Petro-Canada it has a new mandate: To conduct business in a solely commercial manner, focusing on profitability.

1988: Petro-Canada organizes and sponsors the 88-day Olympic Torch Relay.

1990: The federal government introduces legislation to privatize Petro-Canada.

1991: The first shares are sold to the public.

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1995: Government reduces its interest in Petro-Canada to 20 per cent.

1997: Hibernia production launched, yielding 60,000 barrels a day.

2000: Oil sands development begins at MacKay River in northern Alberta.

2004: Petro-Canada signs memorandum of understanding with Russia's Gazprom for a joint project that would ship liquefied Russian gas to North America.

2005: Acquires sponsorship rights for the 2010 Olympic and Paralympic Winter Games.

2008: Signs exploration agreement with Libya.

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2009: Agreement reported in which Suncor Energy Inc. would acquire Petro-Canada in a deal that would merge Canada's two biggest oil companies. The Canadian Press

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SUNCOR ENERGY INC. PETRO-CANADA
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