Sinopec stakes its claim

But the mid-April acquisition by China Petroleum & Chemical Corp. (Sinopec) of a 9% stake in local flagship Syncrude Canada Ltd. for US$4.65 billion attracted attention.

First, it marked the biggest single Chinese investment in Canada, and indeed in North America, so far. Second, the premium it paid to do so, according to Canadian press reports up to $650 million, made it clear that major PRC petrochemical companies are ready to bid against incumbent US-based, big oil players.

Syncrude’s plans to build a major pipeline (the Enbridge Gateway project) from its fields to Kitimat on Canada’s North Pacific coast suggests that part of the strategic thinking behind the deal is the ability to ship product from Alberta fields to Asia, and beyond. This marks a major turning point for Canadian producers, who until now have focused exclusively on the US market.

Heavy oil is petroleum that does not flow freely; and rising oil prices have made it more and more important in the global petroleum sector – with benefits for Canada’s oil sands regions. US and other players have already moved into this area: the 9% stake in Syncrude was shed by oil major ConocoPhillips, which announced last fall that it would liquidate $10 billion of assets, partly to pay down debt.

Players await regulatory green light

The deal has its controversial aspects, and awaits PRC and Canadian government approvals. China is expected to give the go-ahead with little pushback, given the government holdings in the parent SOEs of most publicly-traded Chinese oil entities. The Canadian government green light is likewise expected, but not guaranteed.

“There are concerns around national security, plus the alleged non-commercial activities of Chinese SOEs: that is the biggest political question,” Yuen Pau Woo, president & CEO of the Asia Pacific Foundation of Canada, which studies and promotes trans-Pacific trade, told AVCJ.

“The outcome will mostly hinge on the new guidelines issued a couple of years ago that allow Investment Canada to do a special review of investments by state-owned companies. If that is passed successfully and without too much controversy, I think it will amount to a vote of confidence [in] Chinese state-owned investment into the Canadian resource sector generally.”

In 2004, though, public outcry effectively blocked a takeover bid for Canadian mining icon Noranda Inc. by China Minmetals Corp. And no one has forgotten the political upsets of summer 2005, when the Chinese National Offshore Oil Co Ltd (CNOOC) made its $18.5 billion bid for US-based Unocal. Political pressure caused the offer to be withdrawn in just 40 days.

PRC deals under the radar

Subsequently, Chinese oil giants didn’t retreat from resource acquisitions. Rather, they focused them on other resource-rich countries in the developing world.
But they also continued ramping up their presence in Canada, where today’s oil economics have made local heavy oil fields a very promising future prospect, with reserves estimated as exceeding those of Saudi Arabia in conventional oil.

Sinopec owns 50% of Alberta’s Northern Lights Oil Sands JV with France’s Total SA, while CNOOC has taken a minority stake in MEG Energy Ltd., a private oil sands project. Sinopec also paid some $10 billion to acquire two Calgary, Alberta-based companies, Addax Petroleum Corp and Tanganyika Oil Co Ltd., both with portfolios rich in foreign assets.

Seasoned Canadian oil patch observer Randy Ollenberger, Managing Director of BMO Capital Markets’ energy research team, thinks the supposed China controversy is overdone.

“Simply, it’s difficult for the Canadian government to come to the conclusion that one foreign company can’t sell to another foreign company,” he told AVCJ. “This isn’t the sale of a majority interest by a Canadian company, or of a Canadian asset. It’s a sale of a minority shareholding of one foreign company to another foreign company. So I think it would be most unusual of them to deny the deal.”

Canadian market observers did note, however, that Sinopec’s bid effectively froze out financial investor Canadian Oil Sands Trust, hitherto Syncrude’s largest shareholder with 36.75%. The group had been seen as the natural buyer of the ConocoPhillips block, hence the perception that Sinopec paid a premium to outbid them.

Ollenberger has a different view. “The Sinopec bid was higher than the implied price of Canadian Oil Sands Trust, which is more or less the de facto market value of Syncrude,” he explains. “But it’s actually only slightly higher than our NAV estimate before for Syncrude… it’s in line with what we’d see as a $90 [per barrel] oil price outlook.

“That might strike people as high. But oil prices were $85 at the time, and potentially moving higher. I think we’d argue that oil prices will be $90+ longer term.”

A leg up on the learning curve

What hasn’t been much mentioned is the unquantifiable benefit that Sinopec may get. Along with a seat on Syncrude’s management committee, which allows Sinopec veto power over business-changing decisions, comes the chance to see how a first-class integrated oil sands mining operation is run.

“That’s a more or less priceless opportunity for them in various ways,” Ollenberger says. “They’ve already got their own oil sands mining projects in Canada.”

The Syncrude management committee seat is important on a range of issues that could be strategically important in relation to China. These include  the question of whether to raise the company’s capacity to refine its locally-mined raw bitumen into lighter synthetic oil on-site. If construction of the planned Gateway pipeline proceeds, then rather than being refined on-site, the bitumen could be bound for China, where Sinopec’s core strength is bound up with its refining capability.

“The Gateway pipeline may or may not get built,” Ollenberger observes. “In any case, though, the global oil market is fungible. So while it may be great to produce a barrel of oil and deliver it to your own refiner; you can also produce a barrel of oil in North America and trade it for a barrel of oil that gets shipped to your refinery in Asia.”

In fact, the veto is not exceptional. All Syncrude partners have one, “…so it would be extraordinary if Sinopec did not receive a benefit, a privilege that the other major shareholders enjoy,” says Woo. ”

Is Sinopec valuable to Canada?

University of Alberta Professor Wenran Jiang, a prominent commentator on offshore Chinese oil investment agrees, adding that Sinopec’s refining capability could end up being a gain for Canada.

“If we Canadians are going to develop the oil sands as we do now, we have to carefully consider how we want to do that,” he says. “One obvious way is to keep the value-added aspects at home, rather than shipping the bulk of the bitumen], as we largely do now. If the Chinese are investing in the Canadian oil sands, they may also have an interest in refining in Canada. Sinopec has a strong tradition in that area; it being basically how they got started. They’re now just diversifying upstream.”

“The Americans, on the other hand, have no incentives to invest in building refineries in Canada. They’re saying, ‘Ship it to us.’ That’s what the integrated market is: you produce the bitumen and we refine it. But if the accretion of Chinese, Japanese, Indian and Taiwanese demand continues, there may well be real interest in investing in refining capacity here.”

Oil sands and global trends

For now, the significance of this deal – apart from signaling the readiness of big Chinese players to pay up to get a meaningful share of trophy assets in North America – is Sinopec’s bid for a top-tier seat in the rapidly expanding global heavy oil game, where they can leverage Syncrude’s expertise in the latest management and operations techniques. And global heavy oil reserves are estimated at almost twice those of light crude oil.

Broadly, China is pushing internationally into the petrochemicals game. And with the RMB due to appreciate against the world’s oil index currency, the greenback, deals will likely get cheaper for China, and will gain momentum. 

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• Topics
• Industrials
• Greater China
• North America
• Industry