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China and Canada building bridges

Canada is under mounting pressure to decide how far it will allow foreign state ownership of natural resources

CANADA is under mounting pressure to decide how far it will allow foreign state ownership of natural resources, at a time when traditional sources of capital from the US and Europe show signs of waning.

The administration of prime minister Stephen Harper is faced with choosing whether to the slow the rapid pace of China's entry into the oil sands, in particular, or agreeing with those who argue that China's sovereign oil and gas producers could be vital to the sustainable future of Canada's energy sector.

To date, the government has practically abstained from interfering, attaching only moderate conditions as Chinese firms have quietly ratcheted up their presence in the oil-sands, although Canada accounted for only 1.6% of China's foreign investment last year. But Wenran Jiang, research director at the University of Alberta's China Institute, says it is time for Canada to decide whether China can play a vital role in Canada's energy development.

Robert Johnston, director of global energy at the Washington-based Eurasia Group, says China's state-owned producers can easily co-exist with Canadian producers in Canada. He says a "nascent spirit of co-operation" among US, Chinese and Canadian energy companies can work in the oil-sands, the shale-gas sector of British Columbia and even the Arctic.

In return for co-operating with China and its state-owned producers, he suggests Canada could set the stage for broader economic relationships covering a full range of resources and some of Canada's value-added exports. "From a market perspective, you could argue that access to Pacific markets [for oil-sands bitumen] would help Alberta diversify out of a slower US market," Johnston says. "This is a good time for Canadian resource companies to look West as well as South."

China tip-toed into the oil sands in 2005, when CNOOC bought 16.7% of MEG Energy; and Sinopec acquired 40% of Synenco Energy (since taken over by Total), making fairly bland assertions that they were primarily interested in gathering knowledge and expertise.

Those initial moves have shifted into a flurry deal-making over the past year. CNOOC bought 60% of two leases held by Athabasca Oil Sands (AOSC); Sinopec bought a 9% stake in Syncrude Canada from ConocoPhillips for C$4.65bn ($4.59bn); China Investment Corporation paid Penn West Energy C$0.817bn for a 40% stake in 237,000 acres; and CNPC is negotiating annual joint-venture investments of up to C$2bn to develop Encana's shale-gas deposits in British Columbia.

The level of unease in Canada over these transactions – valued at C$12bn – was expressed in a poll this year by the Asia Pacific Foundation of Canada. Of the 3,000 participants, barely 20% said they felt "comfortable" with a company controlled by the Chinese state investing in Canadian firms.

Opening the doors wide would mean a seismic shift from the government's present screening policy under the Investment Canada Act, which was amended in 2009 to require: proof of net economic benefits to Canada; a commitment to transparent and commercially oriented corporate governance; and vetting by departments responsible for Canada's national security.

But Lei Jianzhong, China's economic consul to Canada, debunks the worries. "Chinese investors are doing business worldwide ... not only in Canada," he says, adding that Chinese investments "are not state policy translated into the Canadian market".

Spending billions

Zheng Li, president of CNOOC Canada, says Chinese companies will spend "billions more" on Canadian oil and gas assets as they scour the world for energy resources. "We hope to make a bridge to connect Canada and China that will mutually benefit both countries," he says. Zheng brushes off suggestions that CNOOC and its peers are puppets of China's political leaders. "There is no political direction or order," he says. "We are businessmen. We are not politicians."

Jiang says Sinopec's stake in Syncrude points to improving relationships between China and Canada after a prolonged chilly period. "The Chinese are coming to Canada because the political context is right," he says. "It's a perfect match of capital and expertise. But the idea that China will spend any amount of money to lock up resources anywhere possible is simply not true."

China's national oil companies have spent $29bn on overseas acquisitions in the past 18 months, according to data from PLS, a consultancy, and have established an upstream presence in 31 countries. Alone, Sinopec and CNPC have participated in 11 deals valued at $77bn involving loans-for-oil. The spending spree is driven by forecasts that China's domestic oil production will decrease by 61% in the 2010-19 period to 3.7m barrels a day (b/d), while consumption will grow 41% to 12.7m b/d, according to Business Monitor International, a consultancy.

Based on his experience with CNOOC, Bill Gallacher, chairman of AOSC, says the Chinese are sophisticated and patient investors with a long-term view and well-defined goals. "They're looking at Alberta for the same reason a lot of other multinationals are looking – the vast opportunity here. They could have bought anything around the world."

But China does not have the oil-sands playing field to itself among state-owned Asian enterprises, all with the same goal of shoring up access to energy supplies. South Korea's KNOC secured oil-sands leases when it took over Harvest Energy Trust for C$4.1bn in 2009 and was promptly identified as a potential partner in the Nexen-Opti Canada Long Lake project, or possible buyer of Opti's 35% share.

Two years ago, Taiwan's state-owned CPC entered an accord with Saskatchewan's native-owned Indian Oilsands to spend almost C$0.8bn over five years acquiring and exploring oil sands-leases in the province, although nothing more has been heard. Meanwhile, Japan Canada Oil Sands, the first foreign firm to enter the oil sands, has been quietly producing 8,000 b/d over the past 11 years from a pilot project, which could be turned into a 35,000 b/d commercial operation next year with Nexen holding 25%.

Over the past four years, India's ONGC, Indian Oil and Reliance Industries have all made noises about investing up to C$10bn in the oil sands, but talks with investment bankers have gone nowhere. Fuelling the latest round of speculation, Atrul Chandra, a senior advisor to Reliance, says the oil sands are "definitely on our radar", spurred by Enbridge's Northern Gateway project to ship 0.53m b/d to Asia by 2015. "We will move in very fast once we have identified a target," he says.

India's junior oil minister, Jitin Prasada, says a group of Indian companies led by ONGC is negotiating with a number of small oil-sands firms and "hope to finalise a deal soon". The companies may go "to Alberta or Saskatchewan", he says, with the aim of spending at least $1.5bn to produce 50,000 b/d.

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