China's $ 1.9 bn Alberta oilsands deal

Un a blockbuster deal, privately owned Athabasca Oil Sands Corp. said PetroChina International Investment Co. will buy a majority stake in its operations for $ 1.9 bn, marking the largest venture by China in the Canadian oilsands to date. Athabasca Oil Sands said the state-owned firm, one of the world's most valuable oil and gas companies, will acquire a 60 % working interest in the MacKay River and Dover oilsands projects.
"This deal shows that the biggest energy company in the world has chosen Athabasca as their partner," chief executive and president Sveinung Svarte said. "They clearly told us that's because they like our assets the best and, obviously, they (the oilsands) are the crude oil story."

The two in-situ projects sit on approximately five bn barrels of bitumen that have yet to be developed, and are part of Athabasca's almost 10 bn barrels of bitumen reserves. The play is one of the largest in the Athabasca region: about 121,400 hectares.
"The reason we chose PetroChina over other some of the other bids was, obviously, their financial strength," chairman Bill Gallacher said. "But also their technological capabilities related to heavy oil and steam assisted gravity drainage, which we believe will benefit our project both efficiency-wise and production-wise."

The Calgary-based company said the projects, which it will continue to operate, will cost between$ 15 bn and$ 20 bn to develop. It has filed for provincial approval for both projects and intends to file an application for the first 35,000-bpd phase of MacKay River at the end of the year.
Commercial oil could flow by 2014, with subsequent phases reaching a total 150,000 bpd production.

The announcement speaks to the value of the Canadian oilsands, said analyst William Lacey of FirstEnergy Capital Corp.
"It puts some pragmatism back into the basin," Lacey said. "There are a lot of companies out there that effectively are being valued at zero. So what this does is come back to the market and says these assets have strategic long-term value."

Athabasca Oil Sands said it had notified federal and provincial officials on the proposed Chinese investment, which would make the foreign entity a majority stakeholder in the oilsands projects. Gallacher did not anticipate any issues to arise from the Competition Bureau on the deal.
"Whatever customary reviews are required, we're going to follow that path and make sure we have all the fulsome disclosure required to make this project move forward," he told analysts.

Darren Cunningham, communications director for federal Industry Minister Tony Clement, said any international investor acquiring a controlling interest in a company with assets more than $ 312 mm will be reviewed under the Investment Canada Act.
While the federal government is supportive of international investment funds flowing toward Canada, "when you have a review under the Investment Canada Act, what needs to be determined is the transaction's net benefit to Canada," he said.

China has led the worldin recovering its thirst for oil, with demand rising 3.5 % year-over-year to 8.1 mm bpd in July, Scotiabank commodities specialist Patricia Mohr said in a recent report. Mohr said developing new export markets in Asia is vital if Canada is to fully exploit the economic advantage of owning the world's second-largest oil reserves.
"The Alberta oilsands represent a key 'strong suit' for the Canadian economy; the development of lucrative export outlets and transportation infrastructure for this resource is key to Canada's growth prospects," she said in the report.

The agreement between Athabasca Oil Sands and China, which includes undisclosed financing arrangements for the Canadian corporation, puts an end to speculation around the glaring lack of investment by Asia's economic dragon in the Canadian oil and gas sector over the past four years.
"Given the sheer size of the Canadian oilsands, it's an area that cannot be ignored by China," said analyst Lanny Pendill with Edward Jones in St Louis, Mo.

The Asian nation has been on a multibillion-dollar spending spree this year scooping up energy assets across the globe to feed its voracious appetite for petroleum products, but that spree has largely bypassed Canada. Insiders speculated the lack of a pipeline leading to West Coast export points and the cost of labour in Alberta's formerly overheated economy had taken the sheen off the Canadian oilsands, despite their representing the second-largest oil reserves in the world.
China's growing appetite for energy and need to secure supply likely will see more involvement in Canada through supply arrangement with major oilsands producers, and deals with transportation companies such as Enbridge, Pendill noted.

The pipeline giant appears to be dusting off its Northern Gateway project, a two-line system from the heart of Alberta's oilsands to Kitimat, BC, that was shelved in 2006 after the market -- including China -- grew cold to the idea. Athabasca Oil Sands has yet to decide how and where it will shipits production, but a lot can happen between now and 2014 when first commercial production is expected, Svarte said.
"So far, the US market is the base case for everybody," he said. "But of course if there are other export routes opening up, we will look at them all when we actually get to that problem. But so far there is nothing planned."

Previous Chinese investments in the oilsands
-- Earlier this year, China Investment Corp. invested $ 1.5 bn in mining giant Teck Resources, giving it a 17.2 % interest in the company. Teck holds a 20 % interest in the Fort Hills oilsands project owned by Suncor Canada (previously Petro-Canada).
-- Sinopec took its stake in the proposed 100,000 bpd northern lights project in April from 40 % to 50 % in a deal. It had paid Synenco Energy $ 105 mm for the stake in 2005. Total bought it in the spring of 2008 for $ 480 mm.

-- The China National Overseas Oil Co. bought a 16.7 % interest in Meg Energy, a private company proposing a thermal oilsands project, in 2005 for $ 150 mm.