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China bulks up in oil sands Forms JV with energy trust to develop Alberta lease, raising investment to C$8 billion; analyst says U.S. wrong to block Chinese Gary Park For Petroleum News
China’s methodical staking out of claims in the Alberta oil sands has taken another leap forward with China Investment Corp., or CIC, offering C$817 million for a 45 percent interest in bitumen assets held by Penn West Energy Trust and C$435 million for a 5 percent equity position in the trust.
That raises to almost C$8 billion the value of three Chinese investments in the past eight months, following PetroChina’s purchase of 60 percent stakes in each of two undeveloped leases held by Athabasca Oil Sands Corp. and Sinopec’s US$4.65 billion move to acquire ConocoPhillips’ 9.03 percent share of the Syncrude Canada consortium.
Trend not something to worry about Despite concerns expressed by some political leaders in the United States over the broadening Chinese presence in North America’s natural resources sector, one observer said the trend is not something to be unduly concerned about.
On the same day the CIC-Penn West deal was announced, Stephen Roach, Morgan Stanley’s managing director for Asia, was telling a Calgary audience that Chinese capital is as well qualified to invest as the capital of other foreign multinationals.
“China, being a member of the World Trade Organization, has to play by the rules of the game,” he said. “If any issues come up, there’s ample opportunities to adjudicate disputes. I would not worry about it.”
Roach suggested that China’s apparently insatiable demand for natural resources is also likely to ease off as the Asian power seeks a more balanced economy that is less reliant on manufacturing and embraces a much larger service component.
China on disciplined path of resource acquisition He said China appears to be on a “pretty deliberate and disciplined path of resource acquisition around the world – whether it’s Africa, Australia, New Zealand, Canada or South America. I don’t see any reason to doubt that those trends will continue.”
Roach said the question is what China intends to do with the resources acquired through its sovereign wealth funds, such as CIC, or its state-run oil companies.
“They’re not going to pack them up and ship them back to China,” he said. “They’re injecting capital into your economy. They’re injecting capital into the resources business around the world.”
Roach said U.S. politicians were wrong to block Chinese investment in their energy sector by spurning the China national Offshore Oil Co. bid for Unocal.
“In an era of trillion-dollar budget deficits for as far as the eye can see and America’s clear need for Chinese capital to fund America’s savings shortfall, it gets tougher and tougher for American politicians to dictate the terms on which the Chinese can provide that capital.”
Spurned Unocal offer could be turning point He said the Unocal deal “could have been a turning point in sending a wake-up call to Washington that America has to be somewhat more open to multinational energy investments in the years ahead.”
Roach also argued that erecting trade barriers will also end up “distorting the allocation of resources.”
While conceding that the Chinese currency is likely undervalued, he said the estimates of 20 percent to 40 percent “sounds like a real stretch.”
He said the U.S. can’t fix a multilateral trade deficit, which it has with more than 90 countries, “by focusing on a bilateral exchange rate,” adding the reason the U.S. has a trade imbalance is because it doesn’t save.
If China does move toward a more service-based economy, its international resource acquisitions will become less important, although it will need to continue importing oil, which is good news for Alberta, Roach said.
Sinopec will need unanimous approval on capital decisions The nature of the Chinese role in the oil sands is reflected in the Sinopec-Syncrude Canada arrangement, which still needs Canadian government approval later this year.
Not only will Sinopec, as a minority partner in the world’s largest producer of synthetic crude, need unanimous approval to make any investment decisions in the consortium, its share of production at 32,000 barrels per day is only about 1.6 percent of the 5.2 million barrels it imports daily.
On top of that it has no real means to ship Syncrude output to Chinese refineries, even if it wanted to. That hinges on approval and completion of Enbridge’s Northern Gateway pipeline-tanker project, which is regarded as increasingly difficult given environmental and aboriginal opposition.
Chinese investment will accelerate Seal development The Penn West joint venture is primarily concentrated on the Seal project in the Peace River area of northwestern Alberta, including 237,000 net acres of leases containing an estimated 6 billion barrels of recoverable bitumen and current production of 2,700 barrels of oil equivalent per day.
A Penn West spokesman said the transaction will accelerate the development of the Seal holdings that would otherwise have remained dormant because the trust does not have the available capital.
CIC was founded in September 2007 to make long-term investments that maximize risk-adjusted financial returns for the benefit of its shareholders.
With close ties to the Chinese finance ministry, it has US$200 billion of China’s US$2 trillion in foreign reserves to spend overseas, with an emphasis on energy.
It holds 17.2 percent of Canadian mining giant Teck Resources, which itself has a 20 percent stake in the Fort Hills oil sands project acquired last year by Suncor Energy in its takeover of Petro-Canada.
Vincent Lauerman, president of Calgary-based Geopolitics Central, said China is now finding a more receptive investment climate in Canada after a chilly Sino-Canada relationship in recent years.
He believes that China’s long-term goal is to ship Canadian crude production across the Pacific.
Within the Canadian petroleum industry there is a desire to open Asian markets for oil sands exports and provide some price leverage to apply against U.S. customers and buy some insurance should the U.S. impose limits or bans on imports of oil sands-derived crude for environmental reasons.
For now, however, the overriding belief is that China is eager to gain knowledge in the oil sands that it can possibly apply to develop its own heavy oil resources and before it seeks outright ownership of any oil sands project.
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