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Canada clears Chinese oil sands purchase Applies stiff conditions to large stake by state-run PetroChina; makes clear Canada eager to allow 2-way trade, resource investment Gary Park For Petroleum News
The Canadian government is opening the door to investment in its energy and mining sector by Asia’s resource-hungry, state-run companies, but has left no doubt that the welcome mat does not constitute a free pass.
In approving PetroChina’s offer of C$1.9 billion for a 60 percent share of two Alberta oil sands properties, federal Industry Minister Tony Clement attached some stiff conditions to the deal with privately held Athabasca Oil Sands Corp.
AOSC has a networking interest in about 1.55 million acres of oil sands leases, including 100 percent of a core holding in the McMurray formation, and has estimated it could eventually turn these properties into developments yielding 500,000 barrels per day.
Clement said in a statement he was “satisfied that the investment is likely to be of net benefit to Canada.”
“Our future prosperity relies on open markets and two-way trade and investment flows that will benefit Canada and Canadians.”
Four months after PetroChina announced its offer, marking the largest direct investment in Canada’s oil patch by one of China’s state-run companies, Clement issued his approval of the purchase, which is now required, under recently introduced legislation, anytime a Canadian company with assets valued at more than C$312 million is purchased by a foreign entity.
Careful consideration He said PetroChina’s plans, undertakings and other information submitted by the company were carefully considered. That list included:
• A pledge to make capital expenditures in excess of C$250 million for PetroChina’s share of development expenses for the MacKay and Dover oil sands projects over the next three years.
• Increased employment in Canada for development of the two leases over the next three years.
• Maintaining a head office in Alberta for the operating companies associated with the projects for the next five years.
• Following AOSC’s term as contract operator for the MacKay and Dover projects, PetroChina will ensure a majority of Canadians hold the senior management positions of the operating companies and will ensure those companies remain organized under the laws of Canada or the laws of a Canadian province.
• The investor will work with AOSC to identify opportunities to apply PetroChina’s technological expertise to enhance the productivity and efficiency of the projects and to optimize the field development of the projects.
• PetroChina will not voluntarily delist from the New York Stock Exchange or the Stock Exchange of Hong Kong without a substituted listing on another designed major stock exchange during the period when it controls the projects.
2007 guidelines Clement’s department, under guidelines issued in 2007, examines the “nature and extent” of control by the Chinese government, PetroChina’s corporate governance and reporting practices, and whether acquired projects will function on a “commercial” basis.
Clement said that to “successfully compete in a globalized economy, (Canada needs) to attract international investment, which can create jobs, raise our level of competition and develop Canada’s long-term economic prospects.”
“Our future relies on open markets and two-way trade and investment flows.”
Completion of Canada’s foreign investment review process is seen as clear proof that a prolonged chilly period in Canada-China relations is thawing, helped by Prime Minister Stephen Harper’s message to the Chinese in December that Canada believes the Asia-Pacific region is more important to its economic well-being than the traditional ties with the United States and Europe.
Transaction seen as turnaround Weran Jiang, who is director of the University of Alberta’s China Institute, told the Calgary Herald that the PetroChina-AOSC transaction marks a turnaround in dealings between Ottawa and Beijing, regardless of Harper’s refusal to back down in his criticism of China’s human rights record.
Jiang said that while the dollar figure associated with the AOSC purchase is “very small,” it shows the Chinese recognize there has been a major policy shift that will lead to more resource and energy investment.
Clearing this major hurdle raises the prospect of other potential foreign buyers launching bids for small oil sands companies, such as OPTI Canada, UTS Energy and Ivanhoe Energy, which often struggle to meet their financial commitments in the absence of cash flow.
William Lacey, an analyst with FirstEnergy Capital, has said the interest demonstrated by PetroChina and the high price it offered for the AOSC stakes is stirring activity among investors.
He said the oil sands are the “domain of large companies,” which can support the capital-intensive, long-term and high-cost needs associated with development. Phil Skolnick, an analyst at Genuity Capital Markets, said the PetroChina entry into the oil sands has made people realize that China does care about the resource and legitimizes the future of the vast deposits.
But Lacey noted that consolidation among oil sands companies has placed the best prospects in the hands of large, well-financed companies, significantly shrinking the number of opportunities.
He said China is not troubled by its near-term position when it is looking at the next 10 or 20 years to meet its demands.
Alain Auclair, head of investment banking for UBS Securities, said the C$1.8 billion takeover of Harvest Energy Trust by state-owned Korea National Oil Corp. is further proof that Canada’s resource and energy sectors are the “most susceptible” to merger and acquisition activity.
“Asian countries with access to capital or strong balance sheets can deploy cash quickly to seize opportunities,” he said. “It’s a trend we’re going to keep seeing, especially for companies that might be under pressure from a balance sheet perspective.”
Bob Schulz, a professor at the University of Calgary Haskayne School of Business, said he expects deals in Canada’s oil patch will be more in the C$1 billion-C$2 billion range rather than blockbuster deals, giving new companies a foothold in long-term projects, but not enough to cause alarm in the United States.
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