State-controlled Sinopec is spending $4.65-billion (U.S.) to become the first Chinese multinational to buy a direct stake in a major producing oil sands project, paying a rich premium for ConocoPhillips Co.'s 9-per-cent stake in Syncrude Canada Ltd. The deal represents the next stage in Chinese investment in the oil sands, as Beijing-controlled companies scour the globe for energy resources and look to diversify the country's growing imports away from the Middle East.
China's growing presence in the oil sands is likely to add momentum to the effort by pipeline giant Enbridge Inc. to build the Gateway pipeline to Kitimat, B.C., and provide Alberta oil producers with access to Pacific Rim markets.
The proposed pipeline, however, faces opposition by environmentalists and West Coast native groups, who have vowed to block Gateway, saying it would bring undue risks to an ecologically sensitive region.
Enbridge is in the process of lining up producers to supply the pipeline. The company has not publicly identified them yet, a spokeswoman said.
Syncrude is the trophy asset of Canada's oil sands, producing 350,000 barrels a day (with a substantial expansion in the works), and reserves of at least 5 billion barrels that ensure decades of future production. It was the first mega-project in the Alberta oil sands, dating back to development starting in 1973.
Until now, Beijing-controlled companies have purchased interests in proposed projects, or minority stakes in companies that have interests in oil sands production.
Sinopec, a subsidiary of China Petroleum & Chemical Corp., first arrived in Canada in 2008 with the purchase of a 40-per-cent interest in the proposed Northern Lights project north of Fort McMurray, Alta. It has since added to that stake and is now a 50-50 partner with France's Total SA.
Chinese multinational energy companies, however, have been increasingly aggressive buying into oil development in the Americas, including Canada, Venezuela, Brazil and Argentina, said Steve Lewis, a China-watcher at Houston's Rice University.
Mr. Lewis said the Chinese are keen to diversify their supply base to feed rapidly growing demand, while producers are eager to develop new markets in the world's fastest growing economy.
Sinopec's willingness to pay a premium for a slice of oil sands production propelled the price for trust units in Canadian Oil Sands Trust, the largest Syncrude partner with a 36-per-cent ownership stake. It gained 5 per cent, with units rising by $1.52 to $32.22 yesterday on the Toronto Stock Exchange.
"They certainly paid full price," said Lanny Pendill of St. Louis-based Edward Jones brokerage. "The fact the Chinese are willing to pay full price just goes to show you that they are out to gobble up as much oil production around they world as they can."
ConocoPhillips announced last October that it was looking to divest $10-billion (U.S.) in assets and company chairman Jim Mulva said the Syncrude sale represents "an important step" in reaching that goal.
"We are pleased that [Sinopec]has recognized the value of this quality asset," Mr. Mulva said in a statement today. "The completion of this transaction demonstrates the strength of the asset base available to meet our asset sales goals."
Syncrude is owned by seven partners, including project operator, Imperial Oil Ltd., with 25 per cent, and Suncor Energy Inc., with 12 per cent.
ConocoPhillips said the Syncrude sale does not indicate that it is retreating from the oil sands.
"We remain very committed to our position as one of the largest players in the Athabasca sands," said spokeswoman Nancy Turner. She noted Conoco and its partner, Total, recently approved an 83,000-barrel-per-day expansion of the Surmont project.
The company said it hopes to close the transaction in the third quarter, subject to approvals from Canadian and Chinese governments.
Although Sinopec is purchasing a 9-per-cent stake in Syncrude, ConocoPhillips held those shares in a separate corporation, and both Investment Canada and the Competition Bureau must review Sinopec's acquisition of that Conoco subsidiary, a spokeswoman for the Houston-based company said.
Ottawa has welcomed investment from Chinese state-owned companies, and has granted approval for a number of deals, including state-owned PetroChina Co.'s $1.9-billion (Canadian) acquisition of 60-per-cent stake in Athabasca Oil Sands Corp.'s Mackay and Dover projects.
It also blessed the China Investment Corp.'s $1.5-billion deal to purchase 20 per cent of Vancouver-based Teck Resources Ltd., which in turn owns a 20-per-cent share in Suncor Energy Inc.'s stalled Fort Hills oil sands project.
"I would think that the review process [for the Syncrude deal]ought to go reasonable smoothly given the stated position of the government of Canada to welcome foreign investment, including investment from China in Canada's natural resources and energy sector," said Peter Harder, president of the Canada-China Business Council.