To all intents, the Chinese appetite for Canadian oil and natural gas assets might seem to have evaporated at a time when it might have been expected to thrive.
The combination of cheap commodities, the beginnings of global consolidation and China’s own rising crude consumption would, in other times, have been the basis for a second round of the buying spree that preoccupied the industry and governments in the 2009-12 period.
The giant PetroChina led the charge with US$15.3 billion in deals in Canada and Australia, sending such a shiver across Canada that the federal government moved with haste to ban the outright takeover of oil sands operated by foreign state-owned enterprises.
The resulting slowdown has been confined over the past two years to only one significant deal - the C$1.1 billion PetroChina paid to complete its buyout of Athabasca Oil Corp’s Canadian Oil Sands project.
That followed PetroChina’s C$1.2 billion investment in a joint venture with Encana to develop Alberta’s Duvernay shale formation.
The other big plays were CNOOC’s takeover of Nexen for US$15.1 billion in 2012 and Sinopec’s acquisition of Daylight Energy for C$2.2 billion and the C$4.65 billion it spent on a stake on the oil sands consortium Syncrude Canada, both in 2010.
Internal issues
But external factors have had the least impact on the drive by China’s biggest oil companies to dust off their files on acquisition targets.
PetroChina and Sinopec have been caught up in government corruption probes and Beijing’s plans to remake the public sector.
In particular, the overhang of the sweeping probe that has snared more than a dozen executives since 2013 is a serious distraction for PetroChina.
“If Chinese oil companies don’t find a way to buy quality companies such as BP quickly, someone else such as ExxonMobil may,” said Gordon Kwan, Hong Kong-based head of regional oil and gas research at Nomura.
“High quality assets only become available once in a while and it may take another decade for similar opportunities to emerge again.”
The clearest signal about China’s offshore ambitions occurred in March when PetroChina President Wang Dongjin said his company had narrowed its overseas interest to asset swaps to lower transaction costs, or takeovers of smaller companies.
Long Run acquisition
That shift in priorities has been evident in Canada, reflected in a Dec. 21 word that an unnamed group of Chinese investors had agreed to acquire debt-burdened Long Run Exploration for about C$100 million, ending the Calgary-based producer’s struggles with a falling stock price.
Under the deal, which is expected to close in April assuming it is approved by shareholders, lenders, Investment Canada and possibly Chinese authorities, Long Run investors will be paid 52 cents a share, a 215 percent premium over Long Run’s closing price on the previous trading day.
Long Run Chief Executive Officer Bill Andrew expressed disappointment that investors in his company will not recover what they paid for shares.
“Market conditions are horrible and we got caught on the wrong side of some acquisitions,” he said.
Long Run said it has now cancelled without penalty an earlier agreement under which Hong Kong-based Maple Marathon Investments would buy 155 million units at C$1.30 each to pay down Long Run’s debt which stood at C$709 million at mid-2015.
That amounts to a default under Long Run’s credit facilities, but the company said it intends to seek a waiver from its lenders.
Chad Ellison, an analyst with Dundee Securities, said in a note that the new arrangement represents about C$27,845 per flowing barrel of oil equivalent per day based on forecast production for 2016.
He said the deal partly saves Long Run from a series of looming debt deadlines over the next year - C$100 million in January, C$125 million in May and C$125 million in November.
“Given the state of current commodity and capital markets, there was little certainty that one-off asset sales could cover ... the required repayments,” Ellison wrote, adding that the deal is “beneficial to all stakeholders versus operating as a going concern in the current commodity market.”
Andrew said “any of the investment bankers will tell you there’s a lot of interest from Asia” in companies or property that are being marketed in Canada, with Asia now on an equal footing with Canadian, United States and European investors.
Other Canadian purchases
The Long Run proposal is similar to the purchase earlier this year of private Calgary-based producer New Star Energy for C$215 million, including C$45 million of assumed debt.
The buyer in that case was Sinoenergy Pacific Corp., a Beijing-based supplier to the natural gas transportation industry that said its first Canadian purchase will be used as a base to grow production.
The other Chinese purchases of Calgary companies since acquisitions tapered off in 2012 were the sale of Novus Energy to Yanchang Petroleum International for C$320 million in 2013, the purchase of Baccalieu Energy for C$236 million in 2013 by China Oil and Gas Group and the sale of Hyperion Exploration to Tri-Win International Investment Group for C$32 million last January.
Greater hopes shelved
But the greater hopes that Canada’s energy production of oil sands crude and natural gas for LNG export would benefit from continuing economic growth, in countries such as China and India, have been shelved.
Yuen Pau Woo, president of HQ Vancouver, a public-private partnership linked to the Business Council of British Columbia, told the Financial Post recently that the Chinese economy is now undergoing a structural change as a result of the evolution of the energy market and the policies of China’s President Xi Jinping.
Woo, who is working to attract Asian companies to establish their North American bases in Vancouver, said he thinks the influx of Chinese capital into Canada will continue, but will not be focused on capturing oil and gas resources.
He said Chinese companies have grown in their domestic market and have little or no experience operating in North America or Europe.
As a result, he said, their initial offshore investments “will be to try to learn to operate outside” China, which seems consistent with the bite-sized stakes that are currently being picked up in Canada’s oil patch.
Concern with Chinese investment
While many smaller oil sands players who are grappling with high debt levels might welcome rescue missions from Chinese entities, the wider mood in Canada is far less positive.
The Asia Pacific Foundation of Canada reported in mid-2015 that although Canadians are generally open to foreign investment a poll showed that Chinese participation was viewed more cautiously than investment from the United States, Japan and South Korea.
Driving that unease was the suspicion of Chinese influence over strategically important industries, especially oil and gas and the use of temporary foreign workers in Canada to develop resources.
In another survey by the China Institute at the University of Alberta, Albertans showed enthusiasm for new pipelines to export energy to China, but a steadily shrinking percentage welcomed Chinese investment in the province.
The results showed only 43 percent thought the door should be opened to that investment, declining from 55 percent in 2011 and 49 percent in 2013.
Only 42 percent of respondents thought more Chinese investment in energy and resources should be facilitated compared with 52 percent and 43 percent in the earlier surveys.
Concern with China’s record
Institute director Gordon Houlden said Albertans increasingly feel that resources in the ground belong to Canadians and are “not all that keen” on any foreign ownership, especially when they factor in China’s record on human rights, governance, labor relations and the environment.
“You can like or dislike China ... but in this 21st Century you just can’t ignore it, particularly if you want diversification,” he said.
However, of those surveyed, only 48 percent agree that Alberta needs stronger ties with China, compared with 57 percent in 2011 and 56 percent in 2013, while only 41 percent thought Alberta’s economy benefitted from China’s growing presence in the province, compared with 58 percent in 2011 and 52 percent in 2013.
On other topics, 54 percent said Canada should reduce its dependence on the United States as an export market, 69 percent favored more trade with Asia and 77 percent viewed China as a valuable outlet.
The institute calculates that Chinese investment in Alberta peaked at almost C$20 billion in 2013, slumping top C$1.6 billion in 2014 and has barely touched C$1 billion this year.
Houlden said the Chinese may have either overpaid for their investments, or seen the value of those assets decline, but he doubts the Chinese have “gone away for good.”
