‘China Inc.’ buys another slice of the oilsands

Another year, another purchase by a state-owned Chinese energy company in Alberta’s burgeoning oilsands industry.

This time it was China National Offshore Oil Corp.(CNOOC) (CEO-N) swooping in to take over a beleaguered and debt-ridden Opti Canada (OPC-V), in a July deal worth US$2.1 billion. 

Assuming it receives approvals from various governments, courts and regulators, CNOOC will gain control of Opti’s 35% interest in the Long Lake oilsands project located south of Fort McMurray, Alta. Major oil and gas player Nexen (NXY-T, NXY-N) will maintain control over the rest and act as operator.

CNOOC will also acquire Opti’s 35% working interest in the Kinosis oilsands development project, located south of Long Lake. The project has received approval for up to 140,000 barrels per day of bitumen production, scheduled to be developed in stages should a positive construction decision be taken next year. 

At Long Lake, delays and problems with bitumen production  increased the partners’ costs and lowered revenue, leaving smaller and poorly capitalized Opti unable to pay its many bondholders. It filed for bankruptcy protection in early July 2011, shortly before striking the deal with CNOOC, and saying that bitumen output would once again fall short of its yearly target.

Long Lake produced just 27,900 barrels per day in its most recently reported quarter, well shy of its 72,000-barrel-per-day design capacity. 

CNOOC has agreed to pay US$1.18 billion to holders of Opti’s second lien notes and assume US$825 million of its first lien notes, as well as shell out US$37.5 million to backstop parties and US$34 million to shareholders.Despite receiving 12¢ a share under the arrangement – more than most stockholders typically collect after their company goes bankrupt – long-term shareholders of Opti who have held on since the financial meltdown of 2008 will be disappointed with the outcome, their shares being worth as much as $25.40 in June 2008.

Long Lake started operations in mid-2007 using steam-assisted gravity drainage technology and an upgrader, with first production achieved in January 2009. Because the project’s bitumen is too deep to mine, like most of the Athabasca oilsands, the in-situ steam-assisted recovery method is used to recover the oil by drilling horizontal wells in pairs, one above the other. Steam is injected into the upper well and it rises to form a “steam chamber” that heats the bitumen, reduces its viscosity and allows it to flow through precision-cut slots in the lower production well. The bitumen collected in the lower well is then pumped to the surface, where it is treated and the associated water is separated and recycled prior to upgrading.

Though the method has been used since the 1970s, problems came one after another at Long Lake, including: issues with water treatment; increased maintenance of the project’s hot-lime softening units; reservoir complexities, such as high water saturation zones; and problems with drill pads.

The Long Lake sale is expected to close in the fourth quarter, pending approval from authorities in Canada and China. 

CNOOC’s move is the latest in a series of acquisitions by state-owned Chinese energy conglomerates in Alberta’s oilsands over the past several years. 

In the race to shore up oil reserves to feed its growing economy, the Chinese have made several important deals to gain a strong foothold in the area, considered to hold some of the largest oil reserves in the world behind Saudi Arabia.

In 2010, Beijing-based refining giant Sinopec (SNP-N) forked over US$4.65 billion for a 9.03% stake in Syncrude Canada, one of the largest oilsands operations in Alberta and the world. 

It bought the interest off ConocoPhillips (COP-N), which said it was selling non-core assets in order to strengthen its financial position and focus more on main projects. 

As a joint venture involving major oilsands players including  Canadian Oil Sands (COS-T), Imperial Oil (IMO-T, IMO-X) and Suncor Energy (SU-T, SU-N), the Syncrude mine produced 107 million barrels of crude oil in 2010.

In September 2009, China’s biggest oil producer, PetroChina (PTR-N), invested $1.9 billion for 60% working interests in two undeveloped Canadian oilsands projects, MacKay River and Dover, owned by Calgary-based Athabasca Oil Sands (ATH-T). 

That April also saw Sinopec up its interest to 50% in Total SA‘s (TOT-N) Northern Lights oilsands project, about 100 km northeast of Fort McMurray. 

In 2007, China National Petroleum (CNOOC’s government-owned parent) bought eleven oilsands leases containing reserves of 1.9 billion barrels.

And in 2005, CNOOC became the first Chinese state-controlled enterprise to take a position in the oilsands by buying a 16.7% stake in privately held MEG Energy for around $125 million.

But what good is buying up far-away oil assets if the state-controlled companies cannot get the oil back to China, where it is desperately needed for development?

For that, PetroChina has struck a deal with Canada’s Enbridge (ENB-T, ENB-N) to transport oil from Alberta to Asia via the planned Northern Gateway pipeline to a new deepwater port in Kitimat, B.C., and then by boat.

The controversial pipeline has been hit by delays, however, as a result of fierce opposition from politicians, environmentalists and First Nation groups, among others.