Athabasca deal gives China an oil sands project of its own

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China is shifting away from being a passive investor in Canada's vast oil sands, striking its first deal for an entire project.

Seven years after China made its first minority investment, PetroChina International Investment Co. is close to owning all of the undeveloped MacKay River project by acquiring the remaining 40 per cent from its joint venture partner, Athabasca Oil Sands Corp. Athabasca forced the $680-million deal by exercising a clause in the original partnership agreement.

The deal needs approval from competition regulators, but not Investment Canada, which approved the agreement when it was originally made in February, 2010.

Now that PetroChina, the largest energy firm under Beijing's control, will soon have its own slice of the oil sands, the path will be smoother for other Chinese deals. The PetroChina agreement demonstrates that Canada is ready to welcome such full ownership, and that China is prepared to take on the difficult business of operating in the oil sands solo.

"The Chinese are becoming bolder and more mature after operating in the Canadian market over the years on a partial basis," said Wenran Jiang, a senior fellow with the Asia Pacific Foundation of Canada and professor at the University of Alberta.

"They are more confident. They feel they can go ahead to do more."

Not only is PetroChina about to own an entire oil sands property, Sinopec International Petroleum Exploration just closed China's first outright takeover of an operating energy company in North America, Mr. Jiang said. Sinopec purchased Calgary's Daylight Energy Ltd. for $2.2-billion in a friendly deal two weeks ago.

PetroChina bought 60 per cent of Athabasca's Dover and MacKay River projects for $1.9-billion in February, 2010. The agreement had a so-called put/call option, allowing either side to trigger the sale of the remaining 40 per cent to PetroChina following regulatory approvals. MacKay River cleared those hurdles at the end of December, with the Alberta Energy Resources Conservation Board and Alberta Environment and Water giving the project their blessings. Both sides then had 30 days to exercise their rights.

"When we made the deal with PetroChina, Investment Canada [approved]the entire deal, including the first part – the 60 per cent – and also the put/call part," Sveinung Svarte, Athabasca's chief executive officer, said in an interview Tuesday. "So it has been seen by Investment Canada and they have decided that it is beneficial to Canada, so the deal is a go-ahead from that side." Investment Canada confirmed it will not review the deal.

PetroChina will pay $680-million, but Athabasca must repay loans to the Chinese giant. In the end, Athabasca will be up about $200-million, Mr. Svarte said.

He called the deal the "perfect divorce" for both parties. However, PetroChina and Athabasca remain partners on the Dover project, and it has the same put/call option. It is expected to receive regulatory approvals in about a year, giving Athabasca and PetroChina the same rights as they had with respect to MacKay River. Observers predict PetroChina will end up with all of Dover.

Both Dover and MacKay are steam-assisted gravity drainage projects, which extract bitumen using drilling techniques rather than mining.

Mr. Svarte said Athabasca did not trigger the sale because of discord between the two parties. Instead, Athabasca's business has changed, and it has the chance to pursue light-oil opportunities. The money will allow it to explore for and produce light oil, while still staying in the oil sands business, he said. He wants light oil to make up 50 per cent of Athabasca's total production. On the flip side, PetroChina ends up with a greater stake in the oil sands, which Asian investors covet.

Mr. Svarte expects the deal to close in two or three months.

China made its first foray into the oil sands in 2005, when China National Offshore Oil Corp. invested in MEG Energy Ltd., then a startup.

All three of China's state-owned energy companies have assets in Canada's oil patch. Further, Korea National Oil Corp. owns all of Harvest Operations Corp.'s equity.