Development in the Year of the Dragon

China will mark 2011 down as the watershed year when it accelerated the swap of its hoard of weakening US dollars for hard assets abroad, with proven oil and gas fields among the most coveted targets.

Faced with a turbulent environment, China’s planners began to view its hoard of more than US$ 3.2 trillion in foreign exchange reserves, much of it in US dollars, bonds and Treasurys, as a source of weakness rather than strength. Already hit by a near 25% loss in the greenback’s value against the yuan since mid-2005, Beijing has activated Plan B to reduce its US exposure while building up its global resources base.

Last year, the Bank of China began work on a new US$ 300 billion sovereign wealth fund to invest in strategic industries around the world. The fund will complement the ongoing investment work of Chinese oil and gas companies, which have become the most active acquirers of hydrocarbon assets in the world, and China Investment Corp. (CIC), the country’s existing sovereign wealth fund.

Chinese majors on the march

By 2015, China could rely on imports for more than 60% of its oil consumption, up from 50% in 2008. By next year, it will overtake the US to become the world’s biggest oil importer to feed its domestic market of more than 10 million bpd.

According to consultancy Derrick Petroleum Services, Sinopec Group, China’s largest oil and gas company, alone bought more than US$ 35 billion worth of global assets between 2009 and 2011. The company accounted for nearly US$ 20 billion of China’s US$ 49 billion outbound M&A activities last year, eclipsing the combined volume chalked up by the Western majors and other Asian companies.

With an eye to China’s growing energy deficit, Sinopec Group has announced that it plans to more than double its equity oil output from overseas projects to over 1 million bpd by 2015 from 2011. Its overseas upstream investment and operating arm, Sinopec International Petroleum Exploration and Production Corp. (SIPC), produced around 458 000 bpd of crude oil from its international fields in 2011, and expects to raise that to more than 540 000 bpd this year.

Its rival, China National Petroleum Corp. (CNPC), said production from its overseas oil and gas fields rose by 15% to more than 100 million t or 2 million bpd last year from 86.7 million t in 2010.

The company has set a target for its international operations to produce 200 million t or about half its total output by the end of 2015 to help offset the decline of its main field in Daqing, which produces around 40 million tpy of crude or about 800 000 bpd. CNPC has given its listed subsidiary, PetroChina Co., the mandate to invest at least US$ 60 billion to acquire global oil and gas assets this decade.

Canada and Latin America on the menu

In recent years, China has added Latin America and Canada to its oil and gas menu that includes traditional fare from Australia, Asia, Africa and the Middle East. Over the past two years, Chinese companies have offered to or paid a total of more than US$ 21 billion for oil and gas assets in Latin America.

The latest move came from Sinochem Group, China’s leading chemicals supplier, which announced it is buying 10% stakes in five deepwater oil and gas blocks in the Espirito Santo basin off the coast of Brazil from Perenco SA, an Anglo-French upstream company headquartered in London. Sinochem did not state its bid price or other transaction details as it seeks to lay “the foundation for the company’s further development in South America”, while awaiting approval of the Brazilian government.

Over the past two years, Canada has attracted a total of US$ 16 billion worth of Chinese investments, and is in line for more, according to Wenran Jiang, a Political Science Professor at the University of Alberta and a special advisor on China to the US and Canada-based Energy Council.

Canadian Prime Minister Stephen Harper is now openly courting Chinese investments, having backtracked from his initial hardline position against the communist government when he came to power in 2005. Faced with a sluggish US economy and its increasingly aggressive environmental opposition to Canada’s ‘dirty’ oilsands, Mr Harper announced that he would make a surprise trip to Beijing this February to try to expand trade ties, with oil exports foremost on his mind. To his government’s chagrin, the US government appears to have backtracked on a promise to support the construction of the Keystone XL pipeline to deliver oilsands to refineries in the US Gulf Coast.

Chinese oil companies are far less inhibited and have told the Canada that they are willing to invest in infrastructure including the proposed Cdn$ 5.5 billion Northern Gateway Pipeline that will deliver Alberta’s oil to the British Columbia coast to be shipped out to Asia. Mr Harper realises Canada is badly trailing another resource-rich country, Australia, which took in a record US$ 9.9 billion worth of Chinese M&A investments last year, up from US$ 3.7 billion in 2010. According to Dealogic, oil, gas and coal acquisitions accounted for the bulk of these investments.

Setting the tone for the Harper government’s friendlier stance towards Beijing, Chinese state-owned firms said they have smoothly and separately wrapped up the acquisitions of three Calgary, Alberta-based oilsands companies in late 2011.

China National Offshore Oil Corp. (CNOOC) Ltd acquired bankrupt OPTI Canada Inc. for US$ 2.1 billion while Sinopec Corp. said subsidiary SIPC completed the takeover of Daylight Energy Ltd for Cdn$ 2.2 billion. OPTI owned 35% of the financially troubled Long Lake project with Nexen Inc., another Calgary-based company, as its majority partner. The partners decided to sell OPTI to cash-rich CNOOC Ltd to stem further losses from its long delay in starting up bitumen production at the Long Lakes mine in the Alberta province.

Sinopec’s takeover of Daylight Energy met little resistance in clearing court and regulatory approvals, and the subsequent approval of both sets of shareholders. Daylight Energy produces around 38 000 boe/d and owns assets in Alberta’s Pembina acreage.

Perhaps most significantly, China now fully owns a Canadian oilsands project for the first time after Athabasca Oil Sands Corp. (AOSC) sold off its remaining 40% stake in a northern Alberta mine to a PetroChina subsidiary for Cdn$ 680 million in cash. AOSC said it would reduce its 2012 capital budget by Cdn$ 190 million by exercising its option to divest its interest in the MacKay River oilsands project to Cretaceous Oilsands Holdings Limited, a wholly-owned subsidiary of PetroChina International Investment Limited. The company added that the sale would enhance its long-term prospects by freeing up its capital and resources for other projects. The deal, which has been given the green light by the Alberta provincial government, does not need the approval of the Canadian government under the Investment Canada Act.

PetroChina International Investment Co., which acquired a 60% in AOSC’s Mackay River and Dover projects for Cdn$ 1.9 billion in February 2011, shows it is ready to own and operate an oilsands mine all on its own. The two companies will remain partners in the Dover project, with PetroChina expected to also buy out AOSC’s stake at a later stage.

Cretaceous Oilsands expects to begin construction of the Mackay River project in February with production starting at 35 000 bpd in 2014, and eventually peaking at 150 000 bpd. With one of the largest bitumen leases in the Athabasca region in the northern Alberta province, Toronto-listed AOSC said it has the potential to produce between 500 000 and 800 000 bpd of crude oil.

China acquired its first taste of Canada’s oilsands in 2005 when CNOOC Ltd bought a small stake in MEG Energy Ltd. Another state-owned giant, Sinopec Corp., has paid Cdn$ 4.6 billion for a 9% stake in Syncrude, Canada’s largest oilsands project.

This is an abridged version of the full article from Ng Weng Hoong, which was published in the March 2012 issue of World Pipelines, available for subscribers to download now.

Read the article online at: https://www.worldpipelines.com/business-news/27022012/development_in_the_year_of_the_dragon/