China is taking another major step into Canada's resource sector, striking a deal to buy an unloved chunk of the oil sands – one in need of cash and patience.
China National Offshore Oil Corp., the smallest of the country's three state-owned energy outfits, has agreed to a $2.1-billion (U.S.) deal to buy OPTI Canada Inc., a struggling oil sands company with unique technology for extracting and processing bitumen from Alberta's oil sands.
The CNOOC deal rescues OPTI's beleaguered shareholders and bondholders, superseding a previous plan announced last week that would convert $1.75-billion (U.S.) of debt to equity under a restructuring tied to OPTI's move to seek bankruptcy protection under the Companies Creditors' Arrangement Act (CCAA).
The deal provides OPTI partner Nexen Inc. with a powerful new ally in its troubled Long Lake oil sands project, while handing CNOOC not only another slice of the world's second-largest oil reserves, but also the chance to learn about a new method of bitumen production.
"This isn't just about reserves. This is also about the technology to take those reserves out," said Chris Lee, the leader of Deloitte & Touche LLP's Canadian energy and resources division. "This is another way for the Chinese to get more operational experience and access to different types of technology."
Indeed, CNOOC, with roots as an offshore oil specialist, was the first Chinese company to invest in the oil sands, buying a stake in MEG Energy Ltd. in 2005. While this gave China an early peek at oil sands development, the OPTI purchase pairs CNOOC with a larger and more experienced partner in Nexen, and comes with a fresh, if struggling, way of dealing with the expensive business of oil sands.
Long Lake sits on bitumen that is extracted using steam-assisted gravity drainage techniques (SAGD). One pipe is used to inject steam into the reservoir, melting the thick, hard bitumen and allowing it to flow to the surface through a second pipe. Companies like Suncor Energy Inc. and Cenovus Energy Inc. have had success with this still-young technology, but their lands are considered top-notch.
Long Lake does not have the same advantage. For example, some areas of its bitumen reserves are saturated with water, making extraction difficult.
Its edge, however, was supposed to come from a new technology OPTI developed. OPTI designed a system where the so-called "bottom of the barrel" – the bitumen that has been going to waste in existing in situ techniques – is instead burned to power the upgrader at Long Lake. Further, this energy could be used to generate the steam necessary in the SAGD process. The company hoped this would reduce costs because less natural gas would be needed to fuel the operation. But the extraction process has encountered extensive difficulties and consumed far more energy than expected. The project was hit with massive delays and missed budgets. As a startup, OPTI struggled as cash went out the door but little came in.
Long Lake's woes, however, may be part of its attraction for CNOOC. The technology may still prove valuable, or at least informative, as it pursues other development projects.
CNOOC will pay more than $2-billion to various lenders, and $34-million to shareholders. While equity investors will only receive 12 cents per share, OPTI is claiming that's a small victory.
"That's very rare in a CCAA," Chris Slubicki, OPTI's chief executive, said in an interview. "We have been in dealings with our bondholders for some time, and at the outset we agreed on the principle that all stakeholders will be recognized any solution to OPTI, and the bondholders honoured that."
OPTI launched a strategic review process in November, 2009. Mr. Slubicki said the CNOOC deal had been in the works long before the company filed for creditor protection. The agreement is expected to close in the fourth quarter.
"We still believe in the asset," he said. "CNOOC is both financially and technologically qualified to pursue it – something OPTI was not."
The deal requires approval from two-thirds of OPTI's bondholders and it has already secured support from 55 per cent of its lenders. Beijing and Ottawa also have to sign off on the agreement, although approval is expected since neither have stood in the way of a foreign investment in energy. Further, John Baird, Canada's Foreign Affairs Minister, on Wednesday said China is a "strategic partner" on energy and natural resources.
All three of China's state-controlled energy companies – CNOOC, PetroChina International Investment Co. Ltd. and Sinopec Corp. – along with China Investment Corp., are players in Canada's oil patch. While they have been content to own minority stakes and learn the ropes, rather than operate the controls, this approach may change as they gain experience. The proposed $5.4-billion (Canadian) joint venture partnership between PetroChina and Encana Corp. fell apart last month as the pair battled over who would run the project, a source close to the deal said.
Nexen, which said it welcomes its new partner and did not want increase its stake in Long Lake, now has a slice of validation to back its project. "The equity market wasn't giving Nexen's share of Long Lake as much as CNOOC was willing to pay," said Ian Mortimer, a fund manager for Guinness Atkinson's global energy fund.
Nexen Inc. (NXY)
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