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China makes low-key entry into oil sands State-owned company acquires minority stake in Alberta oil sands start-up, drawn by advances in technologies Gary Park Petroleum News Calgary Correspondent
Instead of a long-anticipated dive from the high board, China has made a low-key entry to the Alberta oil sands.
CNOOC (70.64 percent held by state-owned China National Offshore Oil Corp.) has acquired a 16.69 percent common shareholder stake in MEG Energy, a privately held oil sands start-up, for C$150 million.
Officials at CNOOC said April 12 they welcomed the chance to get a taste of the “advanced technology and expertise of oil sands development.”
CNOOC Chief Financial Officer Yang Hua said the MEG deal is a “low cost entry into the oil sands,” but indicated confidence that “lower operating costs and higher recoveries resulting from recent advances in technologies have made similar projects economically viable.”
After months of swirling rumors that China was gearing up to take the plunge in an effort to diversify its oil supply sources and gain access to Alberta’s 175 billion barrels of proved oil sands reserves, the attention has been concentrated on the other state-controlled companies, PetroChina and Sinopec.
The street talk had those two companies kicking the tires of other oil sands newcomers, such as OPTI Canada, Deer Creek Energy and UTS Energy. CNOOC-MEG deal a surprise The CNOOC-MEG deal came as a surprise to most observers, given MEG’s brief history in the oil sands.
Formerly McCaffrey Energy Group, MEG started assembling leases near Christina Lake in northeastern Alberta in 1999 and now holds about 33,000 acres holding an estimated 4.8 billion barrels of bitumen in place, of which 2 billion barrels are thought to be recoverable.
The company has approval from the Alberta Energy and Utilities Board to build a pilot in situ project to come on stream in 2006 and produce 3,000 barrels per day initially, growing to a 25,000 bpd commercial operation by 2007-2008.
Beyond that, MEG has been circumspect about its plans to embark on a full-scale commercial operation, although its web-site says its reserves could support a 95,000 bpd project over 65 years.
Chief Financial Officer Dale Hohm told Petroleum News that MEG is opting to grow in “bite size” stages, financing each phase from cash flow. Steam-assisted gravity drainage The pilot phase is a chance to test the steam-assisted gravity drainage used to extract bitumen from deposits too deep to be mined — a technology that Hohm said is “tried and proven,” although each project has its own special requirements.
To date, Alberta has 11 steam-assisted gravity drainage projects in various stages of development, with EnCana and Petro-Canada among the leading players.
MEG and Devon Canada also formed a joint venture last year to examine prospects for a pipeline, costing C$300 million and carrying a 400,000 bpd bitumen blend over 180 miles from Christina Lake to the Edmonton refinery region.
Pending regulatory approval, the Access Pipeline could come on stream in late 2006.
Devon is moving ahead with its own oil sands ventures, including its C$500 million Jackfish steam-assisted gravity drainage project, due to start producing in 2007 and peak at 35,000 bpd in 2008.
As well, Devon has a 13 percent stake in the Surmont steam-assisted gravity drainage project, with operator ConocoPhillips Canada and Total each holding 43.5 percent. Production is due to start this year at 27,000 bpd and grow to 100,000 bpd in 2012.
Hohm said MEG — which raised C$250 million in common shareholder capital last year before the CNOCC deal — does not have any plans to go public, preferring to own and operate its oil sands project.
Over the last year, MEG has talked to about 30 prospective common shareholders and is now examining its financial requirements, he said. China could shoulder aside U.S. Because of China’s thirst for oil, there is a “very real possibility” that China could shoulder the United States aside as the largest market for Canadian oil, said a leading Canadian economist.
If forecasts are correct China will depend on imports for 80 percent of the oil it consumes within 10 years, said Sherry Cooper, global economic strategist for BMO Nesbitt Burns.
The spectacular growth in Chinese demand opens up an “enormous opportunity” for Canada, which has the second largest proved reserves in the world, she told a business audience in Calgary on April 5.
But she said that if more Canadian or Mexican crude starts flowing to China than to the United States, Washington will be “pretty upset.”
That would strengthen Canada’s bargaining hand and could drive crude prices higher than might otherwise have been the case.
Cooper predicted China’s share of world oil consumption will double from its current 12 percent over the next 15 years.
Other observers don’t automatically buy into Cooper’s scenario.
Judith Dwarkin, chief economist with Ross Smith Energy Group, suggested rising Chinese demand would be more likely to realign global markets.
She said the United States West Coast could turn increasingly to Canadian crude, while production from OPEC countries in the Middle East and South America could be diverted to China.
Whatever the outcome, Canadian producers will “want to go first to the markets where their netbacks are the greatest and that’s going to be the U.S. market because it’s the closest and because their refineries are best adapted to our (heavier) kinds of crude,” she said.
What the two analysts agreed on was a shortage of pipeline infrastructure to handle large exports.
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