CALGARY/TORONTO/OTTAWA — Suncor Energy Inc. and Petro-Canada shook up the oil patch Monday with a multibillion-dollar marriage that would create the biggest energy company in the country.

Suncor's proposed all-stock takeover of its rival drove Petro-Canada's stock up by more than 17 per cent to $34.80 Monday morning, while Suncor shares dipped more than 2 per cent to $30.17.

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 that 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.

“This merger creates a made-in-Canada energy leader with the assets, cost structure and financial strength to compete globally,” said Rick George, Suncor's current chief executive and prospective head of the joint venture.

The companies said in a statement early Monday that Petro-Canada shareholders would receive 1.28 shares of the new company for each share they own. Suncor stockholders would get one for one.

Suncor shareholders would end up holding 60 per cent of the combined energy giant, whose market capitalization is pegged at $43.3-billion.

UBS Securities Canada Inc. cited significant benefits of the deal but said the key concern is that it removes Suncor's “pure play” nature, which investors have rewarded with a premium valuation.

The companies said the deal represents a 25 per cent premium on the 30-day weighted average of Petro-Canada shares. The deal values Petro-Canada at $19.18-billion based on Friday's closing prices on the Toronto Stock Exchange.

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.

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 to 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, Tobago and Syria.