China buys more of oil sands
Now owns 50% of proposed mine

April 2, 2009 | By Claudia Cattaneo, Financial Post | read source

China's Sinopec may make further moves in the oil sands, as it believes oil prices will rebound, an expert says.

Teh Eng Koon/AFP/Getty Images

The purchase of an additional 10% interest in the proposed Northern Lights oil sands project Wednesday by China Petroleum & Chemical Corp. (Sinopec) points to a renewal of interest by the Chinese in Canada's oil, said a University of Alberta expert.

Total SA said yesterday it sold the stake for an undisclosed amount to "expand its co-operation" with the Chinese firm. As a result of the transaction, Total and Sinopec will each hold 50% of Northern Lights, a proposed mining project in northern Alberta that was once expected to cost $10.7-billion for a mine and upgrader. Total, which remains the operator, is re-evaluating how to move it forward.

Wenran Jiang, Mactaggart Research Chair at the U of A's China Institute, said the Chinese could make further moves in the oil sands because they believe oil prices will rebound, while the cost of investing has declined from two or three years ago, when the sector was booming.

"The question is the speed and the scale," he said. "Given good opportunities and price, the Chinese are looking and would like to come in, but they are cautious, they don't want to make big fuss."

Helping their return is that receptiveness to Chinese investment has improved as a result of the global financial crisis, the green agenda of U. S. President Barack Obama and a desire to diversify away from the weak U. S. economy, Prof. Jiang said.

"The overall trend is that China is getting more and more market oriented." Meanwhile, "we are doing massive rescues and subsidies. Let's not accuse the Chinese of how much public control they have. The Americans virtually own the banks."

A further advantage of Chinese energy investment is that they would build upgraders in Alberta, a priority of the Alberta government, rather than ship unprocessed oil to the United States for refining, he said.

Chinese state-controlled energy companies were expected to make multi-billion-dollar acquisitions in the oil sands a few years ago, but were frustrated by high acquisition costs, reluctance by oil sands producers to enter into joint ventures and Canadian government hostility. As well, reports that Chinese energy companies were on the verge of striking ambitious deals stoked U. S. concerns about China elbowing into the United States' turf.

In the end, only three small deals moved ahead: In addition to Sinopec's purchase of a stake in Northern Lights, China National Offshore Oil Corp. invested in MEG Energy Corp., and China National Petroleum Corp. bought oil sands leases that it has not yet developed.

It's the second time Total has sold a piece of its oil sands holdings to an Asian firm while aggressively buying assets in the market. In November, 2007, Total sold a 10% stake in its Joslyn oil sands project to Japan's INPEX Corp., leaving it with a 74% stake.

Total purchased 60% of Northern Lights last year, when it acquired Synenco Energy Inc., a distressed oil sands junior company.

Total is now involved in a hostile takeover battle for UTS Energy Corp., another oil sands junior with a depressed stock price that has a 20% interest in the proposed Fort Hills project.

"This change to the Northern Lights Partnership will be an opportunity to engage in closer efforts with Sinopec to develop the oil sands resources that will be necessary to help fulfill energy needs for the next decades," said Yves-Louis Darricarrere, president of Total's exploration and production unit.