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Vol. 15, No. 16 Week of April 18, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

China invades oil sands

Enters thick of production after 5 years of quietly building startup stakes

Gary Park

For Petroleum News

China has entered the thick of Alberta’s oil sands industry, paying a startling ticket price of US$4.65 billion to ConocoPhillips to become a partner in an active producing operation, five years after launching a series of investments in startup operations.

In acquiring a 9.03 percent stake in Syncrude Canada, Sinopec (officially China petroleum & Chemical Corp.), reportedly beat out other state-controlled Chinese, Indian and Middle Eastern companies, as well as existing Syncrude owners and a coalition of several large pension funds in what was a lively bidding round.

The deal puts ConocoPhillips almost halfway to its planned US$10 billion divestiture of assets over the next two years to reduce its debt-to-capital ratio to 20-25 percent from 34 percent.

The betting among analysts such as Oppenheimer’s Fadel Gheit was that the Syncrude stake would fetch in the range of US$2.5 billion-US$4 billion.

Given that “cash is trash” for the Chinese companies, he said their best option is to buy energy assets in a region that “has almost unlimited upside potential” and seize the opportunity to learn from other operators, legitimize their participation and “become part of projects that are growing.”

Hefty premium

What Sinopec is paying for 5.1 billion barrels of proved and probable reserves and almost one-tenth of Syncrude’s production capacity of 350,000 barrels per day is seen as a hefty premium.

It effectively boosted the market capitalization of Canadian Oil Sands Trust, which owns 36.74 percent of Syncrude to C$18.6 billion, C$1.8 billion more than COST’s trading value and debt on April 12.

The other partners in Syncrude are Imperial Oil 25 percent, Suncor Energy 12 percent, Nexen 7.23 percent, Murphy Oil 5 percent and Mocal Energy 5 percent.

Marc Friesen, an analyst at Versant Partners, said the “quite strong price (being paid by Sinopec) should be taken as a very strong signal of China’s interest” in the oil sands.

Peter Linder, with DeltaOne, said the top dollar paid by one of China’s stable of state-run energy companies “legitimizes” the value of the oil sands and shows there is a place for the resource in the world, regardless of the criticism it has faced from environmentalists.

Vincent Lauerman, president of Geopolitics Central, welcomed the transaction as a chance for oil sands producers to seek alternative markets for their output beyond the United States, especially at a time when the U.S. oil market is stagnant and declining.

Lanny Pendil, an Edward Jones analyst, said the deal gives an added boost to Enbridge’s plans for its Northern Gateway pipeline to the British Columbia coast, opening the door to Asian markets.

Expectation of greater access

Assuming the necessary approvals are obtained by the third quarter, there is a strong expectation that the Chinese will secure even greater access to the oil sands, given Beijing’s hunger for assured worldwide oil supplies.

The Sinopec-Syncrude deal will be “just the tip of the iceberg,” said Yuen Pau Woo, chief executive officer at the Asia Pacific Foundation of Canada, which promotes trade and investment between Canada and Asia.

He said China, which control huge foreign reserves, surplus cash and a strengthening currency, is eager to make acquisitions and invest in the resources sector.

Peter Harder, president of the Canada-China Business Council, expects the Canadian government will ratify the deal, given its stated position to welcome investment from China in Canada’s natural resources and energy sector, provided there is a demonstrable net benefit to the Canadian economy.

He told an oil sands conference in February that China’s investment in Canada’s oil sands, energy and mining sectors “is about to take off even more significantly than it has in the last number of years,” following the government’s approval of PetroChina’s C$1.9 billion acquisition of two 60 percent stakes in oil sands leases held by Athabasca Oil Sands Corp.

He said the “stress-free approval” of that deal “went a long way to ease fears that there would be political barriers” to an expanded Chinese presence in Canada’s resource industries.

He said the Canadian government “made it quite clear that it believed unfettered Chinese investment in Canada’s energy sector is good for Canada and good for global trade.”

Harper promises review

Canadian Prime Minister Stephen Harper said the Sinopec bid will get the same review as any other foreign investment, including the net benefit condition and an examination of the impact on national security.

What Sinopec’s entry into Syncrude represents is a clear-cut advance from the more passive Chinese stakes in early-stage oil sands companies into the world’s largest producer of synthetic crude, with plans to raise production capacity to 540,000 bpd by 2020.

The earlier investments involve three separate holdings in startup projects, including the PetroChina-AOSC transaction, and one involving the independent purchase of leases.

In 2005, Sinopec was one of the first from China’s stable of state-run energy companies to surface in Canada by paying C$105 million for a 40 percent stake in Synenco Energy’s proposed Northern Lights project, originally designed to produce 100,000 bpd of bitumen. Sinopec increased that holding to 50 percent last year after France’s Total acquired Synenco.

Total has since withdrawn a regulatory application for Northern Lights, opting to focus for now on its Joslyn project.

China National Offshore Oil Corp. paid US$122 million in 2005 for a 16.69 percent share of privately held MEG Energy, whose initial phase at Christina Lake has been producing about 2,500 bpd. A regulatory application has been filed for a 60,000 bpd expansion, although those plans have been slowed by economic and technical challenges.

China National Petroleum Corp. entered the picture last year by paying an undisclosed amount for 67 square miles of leases containing an estimated 2 billion barrels of recoverable bitumen, indicating it would need several years to study the technical and regulatory aspects of oil sands development before embarking on a commercial venture.

Majority position not expected

Harder does not expect China’s oil sands strategy will involve taking a 100 percent position or “even a majority position” in oil sands ventures until it learns more about the market and reduces the level of political focus on its investments.

He said Prime Minister Stephen Harper has laid out his government’s blueprint for a Canada-China relationship that involves “mutually beneficial objectives in energy.”

Although withdrawing from Syncrude, ConocoPhillips is not abandoning the oil sands, said Chief Executive Officer Jim Mulva.

The U.S. independent is partnered with Total in a 50-50 joint venture at the thermal recovery Surmont project, which is producing about 20,000 bpd.

A second phase of 83,000 bpd received corporate sanctioning in January and is scheduled to come onstream in 2014.

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