The Chinese are coming

State-owned CNPC makes first independent entry into oil sands, disclosing ‘very small’ acquisition of leases, says commercial operation long way off

Gary Park

For Petroleum News

China’s state-owned energy stable has quietly added more oil sands assets to its breeding stock.

China National Petroleum Corp. disclosed June 21 that it scooped up 67 square miles of leases containing an estimated 2 billion barrels of recoverable bitumen at Alberta government lease auctions last January.

Operating through a third-party broker, CNPC paid an undisclosed amount for the properties and won’t pinpoint their location.

Zhang Xin, CNPC’s director general of external relations, said at an Edmonton conference the investment is “very small.”

He said there is a “long way to go” before the giant company, which has 1.2 million employees and operates in 26 countries, will advance from studying the technical and regulatory aspects of oil sands development to an actual commercial project.

But Xin said the acquisitions “clearly show our sincere determination to participate in oil sands developments in Canada.”

The Alberta government took a low-key view of the announcement, insisting the province is open for business and is concerned only about seeing exploration and development occur within regulations.

New layer for China

It is the first time a Chinese company has operated independently to acquire assets.

Two years ago, China National Offshore Oil Corp. paid C$150 million for a 16.69 percent share of MEG Energy, which is planning a 3,000 barrels-per-day pilot and 22,000 bpd commercial venture to recover an estimated 3 billion barrels of bitumen.

Sinopec paid C$105 million for a 40 percent stake in Synenco Energy’s Northern Lights project, which was halted in May because costs of an associated 100,000 bpd upgrader rose more than three-fold to C$6.3 billion.

Synenco has since started exploring strategic alternatives, which most observers believe will lead to outright sale of the company, with Sinopec and France’s Total seen as leading candidates.

PetroChina has also been involved in stumbling negotiations with Enbridge that were once thought likely to result in a 49 percent equity stake in the Gateway oil sands pipeline from Alberta to a British Columbia deepwater port for delivery to Asia and California.

Other developments from symposiums

• UTS Energy did not rule out selling some of its 30 percent stake in the C$15.4 billion, Petro-Canada-operated Fort Hills project to help cover the rising construction costs, but indicated it may achieve the same result by farming out interests in other leases.

The Fort Hills consortium, including Teck Cominco, expects to announce within a month an updated budget and the scheduling of the planned 170,000 bpd development.

“We’ve built substantial land packages over the last two years and we’ve been fortunate enough to have made major discoveries on those,” said UTS Chief Executive Officer William Roach.

“It’s pretty clear to us that it’s very hard for a company with no cash flow to fund all of those,” he said. “It’s pretty clear to us that there is a huge amount of upside in our exploration acreage.”

Roach hinted the development costs are likely to be in the range of C$100,000 per flowing barrel, with the first production flowing in 2011.

He also said UTS will review the “appropriate size” of its Fort Hills involvement over the next year, although he believes there would be a better return from selling all or part of its other leases.

Depending on how UTS shares perform, Roach also said the company will consider raising equity in the markets and issuing debt to fund its share of Fort Hills.

• Nexen Chief Executive Officer Charlie Fischer said oil sands spending could crumble because of government policy moves.

He said Nexen will not approve expansion of its Long Lake project, which is due on stream this year, until it can better assess the impact of any royalty changes in Alberta and the Canadian government’s recent elimination of a capital cost allowance and its planned rules on greenhouse gas emissions.

Because of the cost and time needed to build projects, anything that “adds to capital costs, which extends the payout period, will erode rates of return,” Fischer said. “If (the rates) get too low, we don’t spend the money.”

• EnCana is prepared to spin off its oil sands business if it does not receive value in the eyes of shareholders, Chief Executive Officer Randy Eresman said.

He said EnCana would prefer to have the new production-refining partnership with ConocoPhillips as part of its overall portfolio “getting value recognition within our stock, and then it would be a highly valued asset within our company.”

But if that does not transpire and there is a “big value gap between what pure oil sands players that have integrated assets are worth, vs. what we believe we are getting inside the company, we would consider the possibility to spin out.”

• Petrobank Energy and Resources said it will file a regulatory application in the final quarter for a first-phase 10,000 bpd commercial plant at its Whitesands lease following a successful test of its fireflood technique.

Chief Executive Officer John Wright said the technology has the potential to “double recovery rates from in-situ projects, the capital cost is half what it costs to run (steam-assisted gravity drainage projects) because natural gas is not required and the water produced has some industrial applications,” he said.

Those who once scoffed at Petrobank are now giving the company more serious attention as they closely watch results from test wells that Wright hopes will lead to a 100,000 bpd operation.

Petrobank Chief Financial Officer Corey Ruttan said the patented technology costs C$15,000 per flowing barrel, compared with an average C$100,000 for an integrated project.