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Sweet and sour investments

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Oilfield Technology,

Oilfield Technology correspondent Gordon Cop explains how China has experienced a mixed record of oil and gas investments in North America

For the last several decades, China’s economy has been on a trajectory worthy of a fireworks rocket. Since 2007 alone, its GDP has almost tripled, from US$3.8 trillion to over US$10 trillion. Much of the country’s ascent has been fueled by abundant supplies of coal (which accounts for about 70% of fuel supply). But coal is dirty, polluting and largely limited to electricity production. In order to power the 300 million commercial and private vehicles on the road (and to clean up its air), China needs access to crude and natural gas.

China currently produces 4.6 million bpd of oil and 11 billion ft3/d of gas, but it consumes around 10.5 million bpd and 16 billion ft3/d. Naturally, it would prefer to exploit resources within its own boundaries to cut back on the massive imports necessary to meet the shortfall. According to the US Energy Information Administration (EIA), China has 25 billion bbls of conventional crude reserves and 164 trillion ft3 of gas. In addition, the EIA estimates that the country contains 1100 trillion ft3 of technically recoverable unconventional gas, and 32 billion bbls of unconventional crude.

China’s O&G sector is dominated by 3 oil companies, the Chinese National Offshore Oil Corporation (CNOOC, which handles offshore and international properties), the Chinese National Petroleum Corporation (CNPC, which owns PetroChina, Asia’s largest energy group), and Sinopec (Asia’s largest refiner). Sinopec and PetroChina are tasked with increasing domestic production, but so far the results have been disappointing. Over the last 4 years, crude production has increased annually at a rate of about 50 000 bpd, but crude consumption has grown at over 500 000 bpd every year over that same time period; clearly, alternate strategies are in order.

For the last decade, China has been reaching abroad, seeking out to establish new sources of imports (natural gas via pipeline from Russia, and crude by tanker from Venezuela), as well as making direct investments in major plays around the world.

Gordon Houlden is a Professor of Political Science and the Director of the China Institute at the University of Alberta. While serving as a Canadian diplomat, he spent more than 20 years in various Asian posts. “There are several motivations for China’s international investments,” he notes. “First, most of China’s crude imports are from the Middle East and pass through the Straits of Molucca; they are looking to diversify sources. Second, there has been a huge accumulation of capital in China, some US$4 trillion, and they need to invest it somewhere. Third, they want to learn about advanced technologies, and be able to bring it home.”

While many jurisdictions are not open to international investment, one region, North America, beckons. One of China’s first forays into North America turned into a damp squib, however. In 2005, CNOOC made a bid to acquire Union Oil Company of California (Unocal), for up to US$ 18 billion. On the surface, the bid made excellent business sense; Unocal held extensive natural gas reserves in Asia, and had deepwater drilling experience that would benefit China’s offshore resources. While Unocal shareholders were pleased, the US government was concerned with national security. The US Congress voted against the offer, and referred the matter to President George W. Bush. In the face of stiff political opposition, CNOOC withdrew its bid, and the company was eventually purchased by Chevron.

Lesson learned; Chinese companies henceforth largely looked for minority-share investments within North America’s oil and gas sector. The oilsands, which require tens of billions of dollars annually in order to develop mining and in-situ projects, was an attractive opportunity.

In 2013, CNOOC spent C$17.4 billion to purchase Calgary-based Nexen. The company acquired Nexen’s majority ownership of the Oilsands Long Lake in-situ project, as well as offshore interests in the UK North Sea, US Gulf of Mexico and offshore Nigeria.

China Investment Corporation, the Chinese sovereign wealth fund with US$600 billion in assets, made several significant investments in Canada, including a C$500 million IPO of Athabasca Oil Corp, a C$1.125 billion purchase in Penn West, a C$150 million investment in Sunshine Oil Sands Ltd, and C$100 million in MEG. “According to our figures, by 2015, Chinese investment in Canada was C$52.7 billion,” says Houlden. “70% of that investment has been in energy, with most of that in Alberta.”


Unfortunately, many of the investments turned into disappointments. The oilsands, which holds approximately 168 billion bbls of recoverable bitumen reserves, also holds an additional 1800 billion bbls of unprofitablewaste. Rather than being one homogenous deposit, the Oilsands is made up of an extensive collection of sand channels and clays that undulate beneath the sub-Arctic terrain. The ‘sweet spots’, the areas where the channels are thickest and have the greatest bitumen content and porosity, were snapped up several decades ago. A plethora of second and third-tier prospects beckon to ‘Johnny-come-latelies’ who, in some cases have a less than clear understanding of the challenges involved.

Long Lake, which was touted as having bbls of oil reserves, also had geology that was relatively poorly suited to in-situ steam injection. When first envisioned, the project was divided into four phases of 60 000 bpd production, for a total of 240 000 bpd. After struggling for several years, the first phase has reached approximately 50 000 bpd. Employees have subsequently been laid off, and capex scaled back. In July, a new SAGD production pipeline sprung a leak, dumping up to 5 million l of bitumen, water and sand mixture onto the surface; the company faces millions in clean-up costs and a public relations black eye.

Other investments took similar hits. The stock price in Athabasca Oil Corp has tumbled since China Investment Corporation took a C$500 million stake. Penn West went through a costly accounting scandal. Sunshine Oil Sands West Ells project ground to halt due to lack of funds. In all, the Financial Post reports that China Investment Corporation’s investments in Canada are worth approximately 20 cents on the dollar.

US investments

Over the last decade, China has spent approximately US$55 billion buying US assets. “Investments in the US have been in manufacturing, real estate and services, but there have been some energy investments,” says Houlden. After the Unocal experience, Chinese companies have concentrated on staking out minority shares for the purposes of healthy ROIs and access to advanced technologies. In 2010, CNOOC committed more than US$2 billion to take a one-third stake in Chesapeake Energy’s Eagle Ford and Niobrara shale oil and gas holdings. Thanks to the capital injection, Chesapeake had been able to pursue an aggressive development programme on the leases and has added 160 000 boe/d to its gross production (of which CNOOC receives approximately 53 00 boe/d).

Some of the unconventional resource experience is making its way back to China. According to the EIA, the country has targeted the Longmaxi formation in the Sichuan Basin, located in south-central China, as its primary shale gas exploration and development objective. According to China’s Ministry of Land and Resources, production from shales will reach 600 million ft3/d by the end of 2015.

China’s offshore activities are also advancing. In early 2015, CNOOC announced a deep-sea natural gas discovery in the South China Sea that holds over 3 trillion ft3 of gas reserves; one of the wells flowed 56.5 million ft3/d. The discovery showcased the latest advances in high pressure, high temperature drilling technology.

Since 1996, Husky Energy, based in Calgary, has been involved in JVs with CNPC and CNOOC. Husky has extensive experience operating heavy oil fields in Alberta and Saskatchewan, and the Hibernia oilfield in offshore Newfoundland. In addition to developing heavy oil onshore fields in China, Husky and CNOOC recently announced first production at the Liwan gas project, located southeast of Hong Kong. It is considered one of the fastest developments in the world for a large scale deepwater gas discovery.


The prospects of Chinese investments in North America and other jurisdictions has been clouded for the last several years by a series of corruption investigations. Starting in 2012, President Xi Jinping, newly appointed general secretary of the Politburo Standing Committee (the PSC, the supreme council overseeing the running of the country) launched an anti-graft campaign that targeted major state-owned enterprises (SOEs) including those in the energy sector. More than a dozen CNPC and PetroChina executives were rounded up, including the CNPC’s former chairman Zhou Yongkang and PetroChina’s chairman Jian Jiemin.

Zhou Yongkang’s career (and downfall) serves as an illuminating tale of the web of bureaucratic and business influence that governs China. Zhou trained as a geological technician and, as a young Communist Party member, began his professional career at the Daqing oil field in the 1970s. Through the patronage of powerful mentors, he quickly rose through the ranks in the oil and gas sector until he was appointed head of CNPC in 1996.

Being in charge of the largest oil company in China placed Zhou in a position of influence. He quickly became party chairman in Sichuan province and was promoted to the senior position of minister of public security in 2002, before becoming a member of the PSC in 2007.

As a PSC member, Zhou was in charge of the state security apparatus, which he ran with great autonomy and zeal. After Zi Jinping ascended to general secretary of the PSC in 2012, Zhou came under scrutiny when one of his protégés, Bo Xilai, was implicated in a public scandal involving corruption and murder. Zhou was placed under investigation, and US$14 billion in assets were reportedly seized from his family. In 2015, he was expelled from the Communist Party and convicted of bribery, abuse of power and disclosure of state secrets.

Further C-suite shakeouts have since followed. In early 2015, Sinopec Group announced that its chairman, Fu Chengyu, had retired. He was succeeded by Wang Yupu, an industry veteran with extensive experience in the immense Daqing oil field. CNOOC also announced that its vice chairman, Yang Hua, would replace Wang Yilin, who is moving on to replace Zhou Jiping, the chairman of CNPC.

The future

Even though current low oil prices are spurring once-in-a-decade mega-deals, such as Shell’s US$87 billion acquisition of BG Group, Chinese companies are proving reluctant to participate, publicly stating that, for the near future, they are mainly interested in lesser deals aimed at consolidating holdings. “The corruption investigations may make Chinese executives more cautious,” says Houlden. “If you make a mistake at Shell that costs the company US$100 million, you may get fired. But if you cause one of the Chinese SOEs financial harm, you could face an investigation; it’s better to play it safe.”

There is certainly very little chance of another oilsands mega-deal similar to the Nexen purchase (which remains China’s largest international investment). “When the Canadian government gave its approval to the Nexen deal in 2012, it ruled out future deals where there would be majority control of Oilsands assets,” says Houlden.

Over the last several months, rumors have circulated that the Chinese government is contemplating the merger of SOEs to create an international supermajor. If PetroChina were to be amalgamated with Sinopec, for instance, the resulting company would be twice as large as ExxonMobil. “There have been four phases of reorganisation in China’s O&G sector, so a fifth is always possible,” says Houlden. “Currently, the government wants to make SOEs more market oriented, and making them even bigger and more concentrated would fly in the face of that, so consolidation is not likely in the near term.”

For the near future, there is scant evidence that China will make multi-billion deals in the US. “There is a bedrock issue in North America, and that is the public attitude towards China,” says Houlden. “I have seen polls in which respondents are less wary of Russia than China, and that says a lot. It will be a barrier.”

But the low commodity price environment is still enticing smaller fry to scoop up bargains. In July, Sinoenergy Pacific Corp., a Chinese company that supplies natural gas to the transportation sector, spent C$215 million to acquire New Star Energy, based in Calgary. New Star recently purchased a mature field southwest of Edmonton and tripled production to 4000 boe/d through horizontal drilling and multi-stage fracking. The new owners have confirmed plans to drill 45 wells over the next two years. “China is one of the world’s largest economies, and they will need more energy,” says Houlden. “In the long term, international investment in O&G will be a reality.”

Adapted from a press release by Louise Mulhall

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