China adds oil sands to fold Twin deals lay groundwork for access to supplies, technology; U.S. expected to keep wary eye on Canada’s oil sands, one of its key energy sources Gary Park Petroleum News Calgary Correspondent
Talk has given way to action as China has staked out positions in Alberta’s oil sands and European companies are awakening to the vast bitumen deposits.
Ending months of speculation, PetroChina and CNOOC (China National Offshore Oil Corp., China’s international oil company), two of the largest members of China’s state-controlled stable of oil companies, signed two deals within two days of each other.
A memorandum of understanding on April 14 will see PetroChina and Enbridge cooperate in trying to line up 200,000 barrels per day of production that would make PetroChina the anchor shipper on Enbridge’s proposed Gateway pipeline.
No commercial terms are in place and Enbridge officials stress that the deal is “just a first step,” but it represents the biggest advance yet towards opening up Asia to synthetic crude.
CNOOC led the Chinese entry to the oil sands by paying C$150 million for a 16.7 percent share of a project by privately held MEG Energy that could achieve commercial output of 25,000 bpd in 2008 and eventually grow to 140,000 bpd by exploiting 2.8 billion barrels of recoverable bitumen. U.S. has had exclusive access These developments are expected to stir attention in Washington, given that the U.S. has had exclusive access to Canada’s oil sands output and views the resource as a growing part of its energy security needs.
Although the Bush administration can do little but ensure that the Chinese are not negotiating any special terms, the oil sands producers are eager to find new markets to absorb an incremental 500,000-700,000 bpd of crude over the next five years.
However, U.S. concern might grow if China’s indications that it wants even more deals in Canada start to gather momentum and if state-owned companies display ambitions outside of the normal market place.
But any cause for anxiety is tempered by the more persuasive argument that U.S. markets are accessible by pipeline, a far cheaper proposition than the combination of pipelines and tankers needed to serve Asia.
Still, the door is opening to an Asian market that now consumes 25 percent of world oil production, with the hint of more deals to come. Sinopec: talks under way Hou Hongbin, vice-chairman of Sinopec, another rumored candidate for oil sands investment, said talks are under way that could see his company and PetroChina take a role in other projects, attracted by the 174.4 billion barrels of recoverable reserves in northern Alberta.
“A second (deal) will be bigger and a third one will be much bigger,” he said after meeting with Canadian oil executives in Calgary.
In addition to the raw potential of the oil sands, he said the investment climate appeals to the Chinese.
Hou told reporters that the priority is not to take ownership control but to lock up a wide variety of global oil supplies. “The more sources of import” the safer for China, he said, noting that talks are taking place with 70 foreign oil companies in 18 countries.
CNOOC said the added bonus is the opportunity the oil sands offer for building knowledge and expertise that can be applied to China’s own oil sands and oil shale deposits.
In the case of the Gateway pipeline there is always the prospect of PetroChina taking Enbridge up on its willingness to sell up to 49 percent of equity, but Enbridge spokesman Jim Rennie told Petroleum News that there has been “no strong indication” that the Chinese company wants to take up that invitation.
Besides, he said, Enbridge is confident it can undertake the project without any outside investors. Immediate challenge locking up production The immediate challenge is to aggregate up to 200,000 bpd for PetroChina by locking up contracts with producers.
In addition, Enbridge is trying to achieve contracts to ship 100,000 bpd to California and the remaining 100,000 bpd to other customers in China, Japan or South Korea.
The objective is to have the commercial contracts in place later this year — plus agreements with government and aboriginals in British Columbia — to allow regulatory filing in 2006 in time to complete the pipeline by 2010.
The preliminary plans call for a 720-mile line from Edmonton to deepwater ports at Prince Rupert or Kitimat.
A similar 500,000 bpd system is being offered by Terasen, which has reported “strong support” from 17 interested participants, ranging from producers to refiners in Canada and Asia.
While Enbridge appears to have edged ahead, Terasen insists it is moving ahead with its expansion plans to the British Columbia coast, including a doubling of its current 225,000 bpd capacity to British Columbia’s Lower Mainland, and its efforts to woo partners for the northern route. It said the ultimate decision rests with the producers.
Bob Hastings, an analyst with Canaccord Capital, said in a note to clients that just because Enbridge is first doesn’t mean that Terasen does not have MOUs in place. CNOOC-MEG deal involves technology Although overshadowed by the Enbridge-PetroChina announcement, CNOOC — China’s third largest oil producer — offers a fresh set of elements in its deal with MEG Energy.
For C$150 million, CNOOC can participate in a project from launch to completion and benefit from a technology transfer that will likely not sit well with western interests that don’t trust China’s motives.
On that score, CNOOC Chief Executive Officer Fu Chengyou was candid.
“This investment hits on our focus on long-term growth,” he said in a statement. “At the same time, this move provides a good chance for us to exploit the advanced technology and expertise of oil sands development. These skills may help facilitate the exploitation of the oil sands and shale in China.”
CNOOC Chief Financial Officer Yang Hua said he was excited by the low-cost, low-risk nature of his company’s investment.
MEG, which has accumulated 33,000 acres of leases since 1999, plans to embark on a 3,000 bpd pilot operation in 2006 and grow to a commercial scale of 25,000 bpd by 2008. The reserves point to a possible 145,000 bpd operation over 40 years.
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