China Inc buys another slice of the oilsands

Vancouver – Another year, another purchase by a state-owned Chinese energy company in Alberta’s burgeoning oilsands industry.

This time it was China National Offshore Oil Corp., or CNOOC, swooping in to take over a beleaguered and debt-ridden Opti Canada (opc-v) in a July deal worth US$2.1 billion.

Assuming it receives the necessary approvals from various levels of governments, courts and regulators, CNOOC will gain control of Opti’s 35% interest in the Long Lake oilsands project located just south of Fort McMurray, Alta. Major oil and gas player Nexen (nxy-t, nxy-n) will maintain control over the rest and act as operator. CNOOC will also acquire Opti’s 35% working interest in the Kinosis oilsands development project, located just south of Long Lake. The project has received approval for up to 140,000 barrels per day of bitumen production, scheduled to be developed in stages should a positive construction decision be taken next year.

At Long Lake, delays and problems with bitumen production have increased the partners’ costs and lowered revenue, leaving smaller and poorly capitalized Opti unable to pay its many bondholders. It filed for bankruptcy protection in early July 2011, shortly before striking the deal with CNOOC, saying bitumen output will once again fall short of its yearly target. Long Lake produced just 27,900 barrels per day in its most recently reported quarter, well shy of its 72,000-barrel-per-day design capacity.

CNOOC has agreed to pay US$1.18 billion to holders of Opti’s second lien notes and assume US$825 million of its first lien notes, as well as shell out US$37.5 million to backstop parties and US$34 million to shareholders. Despite receiving 12¢ a share under the arrangement -more than most stockholders typically collect after their company goes bankrupt – long-term shareholders of Opti who have held on since the financial meltdown of 2008 will be disappointed with the outcome, their shares being worth as much as $25.40 in June 2008.

Long Lake started operations in mid-2007 using steam-assisted gravity drainage technology with an upgrader, with first production achieved in January 2009. As the project’s bitumen is too deep to mine, like most of the Athabasca oilsands, the in-situ steam-assisted recovery method is used to recover the oil by drilling horizontal wells in pairs, one above the other. Steam is injected into the upper well; it rises, forming a “steam chamber” that heats the bitumen, reduces its viscosity and allows it to flow through precision-cut slots in the lower production well. The bitumen collected in the lower well is then pumped to the surface, where it is treated (and the associated water is separated and recycled) prior to upgrading.

Though the method has been used since the 1970s, problems came one after another at Long Lake, including: issues with water treatment; increased maintenance of the project’s hot lime softening units; reservoir complexities, such as high water saturation zones; and problems with drill pads, among other things.

The Long Lake sale is expected to close in fourth-quarter 2011, pending approval from authorities both in Canada and China.

CNOOC’s move is the latest in a series of acquisitions by state-owned Chinese energy conglomerates in Alberta’s oilsands over the past six or seven years. In the race to shore up oil reserves to feed its growing economy, the Chinese have made several important deals to gain a strong foothold in the area, considered to hold some of the largest oil reserves in the world behind Saudi Arabia.

In 2010, Beijing-based refining giant Sinopec (or China Petroleum & Chemical Corp.) forked over US$4.65 billion for a 9.03% stake in Syncrude Canada Ltd., one of the largest oilsands operations in Alberta. It bought the interest off ConocoPhillips (cop-n), which said it was selling off non-core assets in order to strengthen its financial position and focus more on main projects. A joint venture involving major oilsands players such as Canadian Oil Sands (cos-t), Imperial Oil (imo-t, imo-n), Suncor Energy (su-t, su-n) and others, the Syncrude mine produced 107 million barrels of crude oil in 2010.

In September 2009, China’s biggest oil producer, PetroChina, invested $1.9 billion for 60% working interests in two undeveloped Canadian oilsands projects (MacKay River and Dover) owned by Calgary-based Athabasca Oil Sands (ath-t). That April also saw Sinopec up its interest to 50% in Total SA‘s Northern Lights oilsands project, about 100 km northeast of Fort McMurray.

Before that, in 2007, China National Petroleum Corp. (CNPC) bought eleven oilsands leases containing reserves of about 1.9 billion barrels. And in 2005, China National Offshore Oil Corp. – the same CNOOC that has just agreed to take over Opti Canada – became the first Chinese state-controlled enterprise to take a position in the oilsands by buying a 16.7% stake in privately held MEG Energy Corp. for around $125 million.

But what good is buying up far-away oil assets if the state-controlled companies cannot get the oil back to China, where it will be desperately needed for development? For that, China’s PetroChina has struck a deal with Canada’s Enbridge (enb-t, enb-n) to ship oil from Alberta to Asia on the planned Northern Gateway pipeline via a new deepwater port in Kitimat, B.C. The controversial pipeline has been hit by delays, however, as a result of fierce opposition from politicians, environmentalists and First Nation groups, among others.