There was a time when Chinese state-owned petroleum companies had rounded up C$35 billion in Western Canadian oil sands and shale gas assets which observers believed would lead to another C$20 billion in capital investment to achieve commercial production by 2020.
But that was five years ago, before anyone could have imagined crude oil’s downward price spiral, and before the Canadian government intervened, banning the takeover of oil sands operations by foreign state-owned enterprises.
The assumption now that Beijing is looking for an exit strategy could be jumping the gun.
Weidong Chen, former chief researcher at CNOOC, which acquired oil and gas producer Nexen in 2009 for US$15.1 billion, pointed the way ahead when he told a Canada-China Forum that Canada has lost credibility as an investment destination because of its inability to build export pipelines and tanker terminals.
Now an advisor to CNOOC, he said Canada’s advantages in the legal, commercial, political and technology sectors are offset by the inability of governments to approve export facilities.
Chen said First Nations’ issues have effectively shelved Nexen’s plans for its Aurora LNG project at Prince Rupert, which would have consumed 3.11 billion cubic feet per day of British Columbia gas.
While competition for LNG markets is intensifying from Russia, Australia, the United States and even Iran, Canada is “just going according to its own pace,” he said.
Chen said private Chinese investors who are still enthusiastic about North American energy resources are now pouring their cash into the United States, which he said is successfully transforming itself into an energy exporter.
Infrastructure issues
Brian Tuffs, chief executive officer of Sinopec Canada, said it is “to the detriment of Canada that it has been unable to resolve its infrastructure issues to an acceptable level with all stakeholders. There are markets that would gladly accept our resources and yet we are unable to get there.”
China sent its vice minister of Financial and Economic Affairs, Han Jun, to Ottawa earlier this year to send a message that if Canada can overcome its energy pipeline impasse Beijing would be open to negotiating its first free-trade deal with any North American country.
The Canada-China Business Council estimates a bilateral trade pact could boost Canadian exports by C$7.7 billion a year by 2030 and create 25,000 Canadian jobs.
Han also said China is in the market for Canadian green technology to help reduce carbon emissions, having already invested US$89.5 billion on clean energy in 2014.
However, he said China will make its own demands, especially the removal of restrictions imposed on oil sands investment, which he said left his government feeling that it was “being discriminated” against.
PetroChina work slows
PetroChina, once tagged to become one of the largest oil sands producers, has now decided to absorb the lessons learned from its MacKay River in-situ project which is expected to deliver its first commercial output later this year, then ramp up to 35,000 barrels per day, on top of the 20,000 bpd it already produces from other projects.
Bob Shepherd, executive vice president of Brion Energy, PetroChina’s wholly owned Canadian unit, told the Financial Post that the oil sands do not enjoy a “particular strategic advantage.”
“They have got to compete with the other opportunities we have,” he said. “We have some lessons to learn before we hit the accelerator on more development.”
MacKay River capital costs were higher than expected, with analysts pegging the final price tag at C$2.2 billion, more than double the original estimate.
Shepherd said Brion faced “growing pains” as it transitioned a C$5 billion joint venture to sole ownership.
But he, too, said PetroChina’s biggest surprise in Canada has been its inability to build pipelines to the British Columbia coast, which he said offers greater market-access opportunities than TransCanada’s proposed Energy East pipeline to the Atlantic coast.
Smattering of deals
Amid that uncertainty, it is easy to conclude that China wants little or nothing to do with further acquisitions, but that’s not quite the case.
A smattering of little-noticed deals over the past year shows the Chinese are still on the prowl and could be ready to pounce, especially if desirable mid-size targets are forced into survival mode.
Beijing-based Sinoenergy Pacific has made two Canadian acquisitions - C$170 million for privately held New Star Energy and C$100 million for debt-burdened Long Run Exploration. Other buyers include China Oil and Gas Group and Yanchang Petroleum International.
All of those transactions have carefully sidestepped the need for review by Investment Canada and none has involved the oil sands.
But they do underscore the fact that China’s Gross Domestic Product is expected to grow by up to 7 percent this year, while its foreign investment is on track to increase 10 percent to US$130 billion, all pointing to the prospect of more offshore acquisitions.
Bargains unlikely to be ignored
Even if the energy industry is low on that shopping list, bargains are unlikely to be ignored, especially now that asset-rich companies such as Penn West Petroleum and Connacher Oil and Gas attempt to fend off default on their lending agreements.
Connacher, in filing for creditor protection, could even put restrictions on oil sands transactions to the test now that it has court approval to sell oil sands leases and extraction plants that include its 5,900 bpd Great Divide thermal-recovery project.
The company has 87,000 net acres of oil sands leases that represent 40 years of reserves, while its two extraction plants handled 14,500 bpd in 2015.
Penn West, which has warned it may be in default by the end of June unless it can reach an agreement with its lenders, is trying to sell assets to pay down its C$1.8 billion debt after acknowledging concern about its “ability to continue as a going concern.”
The company averaged production of 77,000 barrels of oil equivalent per day in the first quarter (with light oil and natural gas liquids accounting for more than half), down 19 percent from a year earlier.
For China watchers, those two companies bear close watching.
