China’s toehold in the oilsands may become a larger footprint (March 29, 2010)

Last September, China made its biggest jump into Canada’s oilsands with PetroChina (PTR-N) slapping down $1.9 billion for a 60% stake in two undeveloped projects near Fort McMurray in northern Alberta owned by privately held Athabasca Oil Sands Corp. of Calgary.

The deal — China’s largest to date in the Canadian province — was hailed as a major endorsement by a foreign investor in the controversial oilsands and a hint that there may be more to come. PetroChina’s investment also helped inject some life back in the sector after many oilsands projects were put on hold after crude oil prices started dropping from their peak of US$147 per barrel in July 2008.

In April last year China Petroleum & Chemical Corp. (SNP-N), or Sinopec, upped its stake to 50% in Total’s (TOT-N) Northern Lights project, 100 km northeast of Fort McMurray.

Indeed, China was one of the earliest foreign investors to look at the oilsands seriously. In 2007 China National Petroleum Corp. (CNPC) bought 11 oilsands leases containing reserves of about 1.9 billion barrels. And in 2005, China National Offshore Oil Corp. took a 16.7% stake in privately held MEG Energy Corp. for about $150 million.

“They are building a global portfolio of energy assets and the oilsands are part of their portfolio,” says Mike Tims, chairman of Calgary investment firm Peters & Co. “They also have more than a trillion dollars of U.S. surplus and it probably makes sense for them to exchange their U.S. dollars for hard assets.”

As investors in a handful of the Canadian oilsands projects, Chinese companies also get exposure to key technology. “Even though Canadian oil (from the oilsands) is currently at the most expensive end of production costs,” Tims adds, “they’ll want to be exposed to the technology and positioned for the future.”

The Chinese economy’s unquenchable thirst for oil and more recent advances in extraction technology are reawakening the Chinese government’s interest in Canada’s oilsands. The government is conscious of its need to diversify sources of oil and diversify how that oil gets to China — whether by tanker or pipeline. And as shareholders, pension-fund managers and environmental campaigners in the West turn up the volume in their protests against the carbon-intensive projects, arguing they are the biggest environmental crime in history, Chinese companies less beholden to interest groups and desperate for oil will be only too happy to pick up any slack.

“When they (the Chinese) come into the country they say they’re very different than other international companies,” comments Robert Ebel, director of the energy program at the Center for Strategic and International Studies in Washington, D.C. “They say: ‘We don’t play domestic politics, that’s your problem. We’re here to find oil and produce it and get it back to China.'”

Ebel also argues that while major oil companies in the West are increasingly turning their attention to the attractive proposition of shale gas as an alternative fuel, the oilsands are generating less attention in the boardrooms of big oil.

“I don’t think the oil companies are dismissing the prospect of the oilsands, but their attention right at this time seems to be captured by shale gas in the U.S. and elsewhere in the world,” Ebel explains. “Some people are calling it a game-changing development, so we’ll just have to watch it. They’re not getting out. They’re just diverting their attention to shale gas so while they’re doing that the Chinese can walk in.

“Thirty years ago we had this great promise of the oilsands,” he continues. “But it never happened. Now we have this great promise from shale gas. Is it going to run into the same problem as shale oil did? I don’t think so. We’ve learned what it takes to drill it and bring that gas to the surface.”

Still, Ebel believes shale gas is merely a “temporary diversion” from the oilsands. And eventually big oil will figure out a cleaner, more environmentally acceptable way to produce the oil from the sands. “No open-pit mining, it will all be through in situ drilling, that’s what’s going to happen,” he says. “The future is there. It’s going to come back.”

In the meantime, Ebel says, it’s only natural that China, which is scouring the world for more oil, would want to come to Canada to see what they can do to get a foothold. “They’re not going to take it all and if it looks like that is going to happen, believe me, the international oil companies would come in and protect their positions,” he explains. “Chinese investment will be on the sidelines. Remember what happened when China tried to acquire Unocal? They didn’t do their homework and it was shot down very quickly.”

That may be true, but this is Canada, not the U.S. In December, the federal government approved the deal with Industry Minister Tony Clements saying he was satisfied the investment “would be of a net benefit to Canada.”

“Our future prosperity relies on open markets and two-way trade and investment flows that will benefit Canada and Canadians,” Clements reasoned.

And as Canadian Prime Minister Stephen Harper said recently: “Expect more Chinese investment in the resource and energy sectors. . . there will definitely be more.”

Under PetroChina’s deal with Athabasca Oil Sands, it will get roughly three billion barrels of Alberta oil. (The two undeveloped projects together contain an estimated five billion barrels of recoverable bitumen.)

The Chinese corporation, an arm of state-owned China National Petroleum Corp., must spend more than $250 million in each of the next three years, keep an Alberta head office for its operating subsidiaries for at least five years, and make sure that Canadians take the majority of the senior management positions.