The first, Western Oil Sands Inc. , signed an exploration deal in northern Iraq in May. Previously, Western's sole asset was a stake in Shell Canada's Athabasca oil sands project near the Syncrude project in northern Alberta.

Canadian Oil Sands Chief Executive Marcel Coutu said his trust's cash bid, which aims to beat two rival offers for Canada Southern, is not a big departure. He argued Arctic reserves would eventually be a hedge against surging gas fuel costs at Syncrude, the world's largest oil sands operation.

The trust has a 35.5 percent stake in Syncrude, which just finished a massive, C$8.3 billion (US$7.4 billion) expansion.

"In essence, it is relatively cheap insurance against natural gas price increases, as we believe this asset will appreciate if our domestic cost for gas at Syncrude rises," Coutu told analysts.

However, gas development is likely a decade away, he said.

Canadian Oil Sands is offering US$9.75 a share for Canada Southern, an 11 percent premium to its closing Nasdaq price Friday and a 30 percent boost to an offer from Petro-Canada that the target company has already rejected.

Canada Southern shares jumped US$1.60 to close at US$10.37 on Nasdaq, well above the bid and more than double the price before the company was put into play last month.

Petro-Canada, operator of many of the Arctic holdings in which Canada Southern has interests, opened the bidding with a US$113 million hostile cash offer in May. Canadian Superior Energy Inc. has since said it will offer US$123 million in stock. It mailed the formal documents on Monday.

Petro-Canada is weighing options for its next move, said spokesman Rod Thornton. "Our guys are taking a look at it and when we have a response we will certainly issue one," he said.

Any counteroffer now will have to take into account a break fee amounting to 4 percent of Canadian Oil Sands' offer value.

Canada Southern estimates its discovered marketable gas resource in the Arctic islands at a hefty 927 billion cubic feet equivalent. Proved and probable reserves are pegged at 13.7 billion cubic feet.

Canada Southern also has properties in British Columbia, Alberta and the Yukon producing a relatively small 6.5 million cubic feet of gas a day. Canadian Oil Sands would sell those.

Canadian Oil Sands' trust units were down C$1.25, or 4 percent, to C$29.94 on the Toronto Stock Exchange.

Mark Friesen, analyst at FirstEnergy Capital Corp., said Canada Southern's Arctic gas could be "stranded," or unable to reach markets, for years, meaning Canadian Oil Sands' natural hedge may not materialize.

"When you consider the remoteness of these assets, the practicality of that argument is questionable," Friesen said.

Canada's oil sands processing plants, now target of billions of dollars in investment by the world's major oil companies, are major consumers of natural gas and rising gas prices have pushed up operating costs.

However, surging crude prices and synthetic oil production have widened profit margins on each barrel sold, keeping returns rich for oil sands developers.