Petrodollars: Chinese investors second-guess Canadian projects

The trans-Pacific partnership of China and Canada promises to diversify product access for one of the biggest oil consumers in the world, but it also comes with problems, as Ashok Dutta explains in this week’s Oilgram News column, Petrodollars.


 

With customary dragon dance and street parades, the 150,000-odd members of the Chinese community celebrated their new year in Calgary’s Chinatown in mid-February.

However, just a few blocks away, where Canada’s oil majors are headquartered, the mood continues to be somber for officials of Chinese state-owned oil companies working tirelessly to improve profit margins of their mega investments in Alberta.

Since 2009 until late 2012, they spent a whopping $33 billion in acquiring majority and minority stakes in the province’s oil sands companies, primarily in the name of energy security.

Unfettered access to proven upstream oil resources is precisely what Chinese state-owned enterprises (SOEs) were looking for since the late 1990s and Canada seemed an ideal destination, as the nation’s foreign investment rules allowed them easy passage.

But a few years later, the euphoria is fast vanishing.

There is a growing sense of disappointment on the performance of acquired Canadian assets and a feeling is fast gaining ground in China that oil sands projects are too costly to develop, said Wenrang Jiang, an advisor with the Alberta government and a backroom official who acted as a catalyst to bring about the blitzkrieg of Chinese energy investments.

Jiang did not give any estimate on the extent of how much China may have overspent for its Canadian assets, but Calgary-based analysts said the $4.65 billion paid in 2010 by Sinopec to acquire a 9% stake in Syncrude Canada was “grossly” overpaid. Analysts have said Sinopec paid as much as $1 billion more than necessary on the deal.

One analyst’s commentary on the transaction said it implied an obvious desire to capture proved reserves and production as it had valued Syncrude’s proved bitumen reserves at $23/b, which was, at that time, substantially higher compared with its industry peers.

There are other significant issues also weighing on the minds of Chinese dealmakers.

Chinese investments in Canada have gone up every time Prime Minister Stephen Harper has warmed up to Beijing, particularly after Canadians were spurned by the US, Jiang said, noting the $15 billion investment by CNOOC to acquire oil sands producer Nexen Corp came soon after Washington indicated that approval of the Keystone XL pipeline may not happen.


 

Gordon Houlden, director of the China Institute at the University of Alberta in Edmonton, described it as the single-largest energy investment by China in its 5,000 year history and one that was made with heightened expectations of Chinese SOE’s finally laying their hands on mega resources.

After all, Nexen has not only oil sands and shale gas assets in Western Canada, but in the UK’s North Sea, offshore West Africa and the Gulf of Mexico.

However, the Nexen deal has proven to be a mixed bag. For one, the westward pipeline that was expected to bring oil sands crude to China has not materialized.

Also, when Canada made fundamental changes to the Investment Canada Act in late 2012, which disallowed foreign companies from acquiring a majority stake in an oil sands company, the legislation was seen as a way to keep the Chinese at arm’s length from Canada’s resource wealth.

“China didn’t like the restriction. With Canadians viewing oil sands as their sovereign wealth, the Chinese developed a sense of being victimized and unwelcome,” Jiang said.

The results will likely be too obvious to ignore: Chinese SOE’s are in a “refrained” mindset which will result in a “choking” impact on future investments in Alberta, he said.

While inevitably the curtains may have come down on the multi-billion dollar deals, Chinese oil companies are now crunching numbers on capital costs to rationalize their investments. They are also working out ways to see where Canada fits in its upstream drive to acquire energy assets that started a decade ago.

“They will refrain, but not retreat,” Holden said, implying Chinese SOE’s will not sell their Canadian assets.

“They have over $4 trillion of foreign exchange reserves and their investments have been in treasury bills. But, owning overseas energy resources is close to their hearts,” Holden said. As returns on T-bills are exceptionally low, it’s no surprise China would seek to bolster returns in resource investments.

Of its total crude oil consumption, China imports about 60% from the Middle East, Russia, Latin America and the former CIS states.
However, there are geopolitical risks associated with these areas, and that leaves Canada a role to play, Jiang said.

China is well aware of the advantage, but it’s time now for its national oil companies to bring about a change in the way they operate international assets.

Apart from needing to learn how to interpret domestic pipeline and other oil-related politics, “they need to learn ways to work in a free market economy, like Canada,” Holden said.

— Ashok Dutta in Calgary

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