Canadian oil sands lure Chinese investors (video)

Huge domestic demand and high crude prices spur stakes in overseas energy reserves

PUBLISHED : Monday, 12 November, 2012, 12:00am
UPDATED : Tuesday, 13 November, 2012, 2:20pm


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In 1778 when Alexander MacKenzie first sighted a sticky black substance in Canada, he wrote in his journal that the locals mixed it with spruce gum to waterproof their canoes. MacKenzie, one of the first Europeans to report seeing oil sands in Canada's Alberta province, also mentioned that heating the oil sands caused them to smell like black coal.

That, for the moment, was that.

The substance was of passing interest only, and although scientists and entrepreneurs in the 20th century devoted decades trying to unlock the oil sands' riches, commercialisation was elusive. It was not until 1967 that the world's first oil sands production project came on stream in Fort McMurray, in Alberta.

But since oil from sand is much more expensive than conventional crude oil, pioneer Canadian project investors such as Suncor Energy and Syncrude did not turn a profit from plants built in the 1960s and 1970s until early this century, fuelled by insatiable demand from emerging markets such as China and India. At one point, oil prices pushed through US$140 a barrel, making it clear that companies needed to look further afield for energy - and re-examine assets such as oil sands.

Persistently high oil prices over the past decade have forced oil companies to develop more expensive-to-extract oil found in deep-sea regions, shale rocks and oil sands.

State-backed Chinese firms are among the most aggressive investors in Canadian oil sands projects and have taken an active role in their development as they seek to expand overseas to secure future energy reserves at a time of lacklustre domestic output growth.

With its stable political environment, Canada has become a top destination for Chinese firms seeking to acquire overseas oil and gas assets in recent years, together with the United States, Brazil and Argentina.

The most notable Canadian deals include PetroChina's C$2.6 billion (HK$20.1 billion) acquisition of Athabasca Oil Sands, the C$4.65 billion purchase by China Petrochemical Corp (Sinopec) of 9 per cent of Syncrude and CNOOC's US$2.1 billion purchase of Opti Canada. Sovereign wealth fund manager China Investment Corp also bought a 45 per cent stake in an oil sands project owned by Penn West Energy Trust, for C$817 million.

China's interest in the resource was further demonstrated when Calgary-based Sunshine Oilsands listed in Hong Kong early this year. It raised about US$300 million from CIC and Sinopec, which were quick to take stakes in the company.

While Canada is seen as an easier place to make energy acquisitions than the US, where political factors can easily come into play - strong political opposition killed CNOOC's US$18.5 takeover bid for California's Unocal in 2005, but some fear this may change. They note that CNOOC's friendly US$15.1 billion offer to buy out Calgary-based Nexen has drawn opposition from some politicians. Nexen has an oil sands project in Canada, but most of its assets are offshore.

This concern deepened after Ottawa unexpectedly rejected Malaysia's state oil and gas firm Petronas' C$5.17 billion offer last month to take over Canadian Progress Energy Resources.

However, regardless of the outcome of the Nexen deal, which is awaiting government approval, Chinese investment in Canada's oil sands industry will be around for many years.

David Sealock, a vice-president of corporate operations at Sunshine Oilsands, said oil sands projects primarily suited long-term investors with an investment horizon of at least five to seven years. "This is because the capital expenditure is high, and the regulatory process is long," he said.

Sealock said it cost his company about C$34,600 just to add daily capacity of one barrel of bitumen from oil sands. To reach its target of 200,000 barrels of daily output capacity by 2017, it would need capital investment of C$6.9 billion.

About 55 per cent of the cost lies in building the so-called central processing facility, which generates steam and carries it into the wells to process bitumen and extract oil-rich fluids from the oil sands.

CLSA head of Asia oil and gas research Simon Powell said recent weak crude oil prices did not bode well for profitability of oil sands projects, but Chinese investment had the added objective of accumulating knowledge and experience to help develop high-cost heavy oil projects in the domestic market.

According to Neil Beveridge, a senior analyst at Sanford Bernstein, to be marginally profitable, oil sands projects require oil prices to be at US$80 to US$90 a barrel, when all depreciation, distribution and administrative costs are accounted for, in addition to cash operating costs. US oil is trading at about US$90 a barrel.

"While US firms are delaying and cutting back on oil sands projects investment in preference of [projects to extract oil and gas trapped in shale sedimentary rocks], Chinese firms' investments in the sector are a logical move since Canada has been historically open to Chinese investment and the Chinese firms can put their low-cost capital to work," Beveridge said.

Oil sands are a mixture of clay, sand, water and bitumen, a sticky, black energy-rich substance. Oil sands can also be extracted from open-pit mining, followed by a separation process to extract bitumen. Alternatively, bitumen can be recovered by heating underground rock formations until they liquefy and then pumped out, but it requires upgrading before it can be refined into petroleum.

Just over half of Alberta's bitumen comes from surface mining, but this is expected to drop in the future since an estimated 20 per cent only of its recoverable oil sands reserves are accessible to surface mining. Anything more than 75 metres deep will need underground steam injection and oil pumping to unlock the energy wealth.

Ranking after Saudi Arabia as a rich source of conventional oil, Venezuela and Canada are respectively the world's second and third-largest oil reserves holders, thanks to their oil sands deposits.

The ranking only includes reserves that are recoverable using existing technology. Alberta, almost three times the size of Britain and whose oil reserves are almost entirely oil sand-based, has 95 per cent of Canada's oil reserves.

Alberta produces more than 1.6 million barrels of crude oil per day from oil sands, or just over half of Canada's total oil output. Canada supplies about 20 per cent of US oil imports.

The Canadian Association of Petroleum Producers forecasts that oil sands' contribution to Canada's crude oil output will rise to 80 per cent by 2030 from 53 per cent last year.

One of the biggest uncertainties facing Alberta's oil sands industry's expansion is the timing of construction of a major pipeline from Alberta to Texas in the US. The US$7 billion, 2,700km pipeline proposed by TransCanada has been rejected by President Barak Obama, citing safety and environmental concerns.