China has made an early start on the Year of the Dragon, which officially gets under way Jan. 23.
In full fire-breathing mode, the economic giant has sent its state-owned oil enterprises on raiding missions to North America, devouring whole operations in the process.
In Canada, one Chinese national oil company has moved beyond a step-by-step strategy over recent years to take over an oil sands project, while another has struck a US$2.5 billion deal to acquire 33 percent of five new U.S. shale plays by Devon Energy.
The message from Beijing seems to be loud and clear.
“The dragon returns and there is the potential for more interest,” said Wenran Jiang, a University of Alberta political science professor and senior fellow at the Asia-Pacific Foundation of Canada. “This is not done yet.”
China’s confidence in Canadian assets is fueled by its own desire for energy security, bolstered by the Canadian government’s decision to abandon the Kyoto Protocol and the diminished resistance in the U.S. to Chinese investment in natural resource assets.
Other moves
These moves come on the heels of two others initiated by the Chinese in the past month.
China National Offshore Oil Corp., or CNOOC, led the pack by negotiating a deal with Canadian independent Nexen to earn working interests in six deepwater exploration wells in the Gulf of Mexico, although no financial terms were disclosed, and acquiring OPTI Canada, a 35 percent partner in Nexen’s Long Lake oil sands project, for C$2.2 billion.
Just before Christmas Sinopec, China’s petrochemical and refining giant, finalized a C$2.2 billion buyout of Daylight Energy in the first outright Chinese takeover of a conventional western Canadian oil and gas producer.
The oil sands deal will see Cretaceous Oilsands Holdings, a wholly owned subsidiary of PetroChina, pay Athabasca Oil Sands Corp., or AOSC, C$680 million for the 40 percent of the MacKay River in-situ project it doesn’t already own.
It could exercise a similar option for AOSC’s remaining 40 percent of the Dover project late this year. That would cost an estimated C$1.32 billion.
The two ventures, which PetroChina joined in 2009 for C$1.9 billion, are designed to produce 150,000 barrels per day from the MacKay lease, which is due on stream in 2014 at 35,000 bpd, and 250,000 bpd from Dover.
Almost simultaneously Sinopec reached an agreement with Devon — which also has thermal oil sands operations in Alberta — to access leading shale prospects in Michigan, Oklahoma, Louisiana, Colorado and Wyoming.
The deal has been valued at $5,000 per acre, compared with $15,000 per acre for the 25 percent interest Chesapeake Energy sold to France’s Total on Jan. 3 for $2 billion in upfront cash and future drilling costs in Ohio’s Utica acreage,
It follows a similar deal two years ago, when Chesapeake and Total announced a $2.25 billion joint venture for the Barnett Shale in Texas.
Analyst: deal ‘impressive’
Jefferies analyst Biju Perincheril rated the Devon-Sinopec deal as “impressive,” given the lack of market interest and drilling results in the various shales, indicating “sufficient interest in emerging plays that are less ‘hot’ than the Utica.”
Cretaceous President Zhiming Li said that although his company has the ability to develop MacKay on its own it is also open to taking on a partner.
He said that after two years of working on the project, it is certain the lease contains high-quality bitumen.
The MacKay development, which carries an estimated capital cost of C$6.5 billion or C$43,000 per flowing barrel, was approved before Christmas by Alberta regulators, setting in motion a put/call option for AOSC’s 40 percent stake.
AOSC President Sveinung Svarte said the final arrangement is “a perfect divorce because PetroChina has ambitious growth plans for Canada. MacKay and Dover contained estimated best-case contingent resources of 5 billion barrels.
PetroChina now holds 11 oil sands leases in northern Alberta as part of its drive to round up worldwide opportunities.
Li said the oil sands are a major target of his company’s goal to develop prospects that are “much bigger” than the initial 35,000 bpd planned for MacKay.
Competition Bureau must endorse
The AOSC transaction does not require clearance from the Canadian government’s foreign investment agency, having already received that approval when PetroChina committed to spending more than C$250 million to develop MacKay and Dover over three years, while increasing employment in Canada and ensuring Canadians held a majority of senior management positions if it became operator.
However, it does require endorsement from the federal Competition Bureau, which will examine the risk of PetroChina cornering the oil sands market.
And there is no question that the latest round of deal-making builds dramatically on a step-by-step process that saw Chinese firms take minority stakes in start-up firms six years ago, that secure part-ownership of larger ventures and now move assume control of whole operations.
Goldy Hyder, general manager of Hill & Knowlton, a lobbyist for Canadian and Chinese clients on big energy deals, said the question is whether the Canadian government will want to be part of the Chinese strategy to transfer its technological know-how to Beijing and afford China protection against disruptions in supply from conflict or politics.
The expansion of Canada’s horizon is also expected to stir interest in Washington, which has viewed the oil sands as a captive source of supply that can be turned on and off at will in the absence of any other exports for Canadian crude.
—Gary Park
