China's reach into Alberta oilsands signifies resource's vital role
Penn West follows Athabasca Oil Sands to court Asian partner
An employee walks at an oil storage site of the Sinopec Corp. on the outskirts of Taiyuan, the capital of north China's Shanxi province.
Photograph by: Archive, Reuters
CALGARY - In the days following the initial public offering of Athabasca Oil Sands, the chatter at the many fundraising events around town centred on which company would be next to do a deal with a Chinese entity — whether an operating oil and gas concern or with a sovereign wealth fund. The consensus view was when, not if.
And now we know.
On Thursday, Penn West Energy Trust essentially took a page out of the Athabasca playbook in that it sold a 45 per cent interest in its Seal oilsands play in the Peace River region to China Investment Corp., in a deal that also includes the sovereign wealth fund taking a five per cent equity stake in Penn West for $435 million.
The $1.2-billion deal once again shows the slow and deliberate strategy being taken by China through its various entities aimed at shoring up access to natural resources.
What’s ironic, perhaps, is that the transaction was announced on the same day Stephen Roach, Morgan Stanley’s managing director for Asia, delivered a somewhat bearish perspective on the future of China’s demand for natural resources to a crowd of business leaders — many of them energy executives.
Essentially Roach said that China, as a result of its push for a more balanced economy that is ultimately less reliant on manufacturing and includes a greater service component, will see its demand for oil and other natural resources decline as this shift is established.
The point here is that the resource-rich countries shouldn’t expect to see the exponential growth of the past decade continue indefinitely.
The CIC investment in Penn West, which is in the process of converting from a trust structure back into a conventional exploration and production player, doesn’t appear to fly in the face of Roach’s view, though not everyone in the room on Thursday morning agreed with his view.
Like other investments made by Chinese-based companies, the CIC move is about capturing more of a resource that is going to fuel their economy.
It’s estimated the resource-in-place at Seal is in the five billion to six billion barrel range, with the recovery factor using a steam-assisted process being between 15 per cent and 40 per cent.
“There is no silver bullet for China — they will need everything as they continue to industrialize,” said Phil Hodge, managing director of Mackie Research Capital Corp. who acted as adviser to Penn West on the transaction.
It also suggests that as China continues to industrialize, and have domestic consumption make up a bigger part of the country’s gross domestic product, the demand for oil is unlikely to fall off the cliff.
The more plausible scenario is that demand increases as millions more Chinese citizens are lifted from poverty from the myriad investments currently being made in the country aimed at doing exactly that.
All this points to higher, not lower, oil prices.
Otherwise, why would China Investment, PetroChina or Sinopec be investing in the oilsands?
“They are making a hefty bet that the oil price will justify developing the raw oilsands . . . it’s signalling prices won’t be low,” said Leonard Waverman, dean of the Haskayne School of Business at the University of Calgary.
The motivation for Penn West to do the deal was fairly straightforward.
In order to develop their oilsands play — Seal — Penn West needed cash; under the royalty trust structure it wouldn’t have been possible to proceed.
“We had a piece of cake too big for us to eat alone,” said Murray Nunns, president and chief operating officer of Penn West. “We had more inventory than dollars on the conventional side and we also needed to unlock the value at Seal.”
The other problem Penn West had was that of too much leverage — cleaning up the balance sheet to put it on the same footing as its peers in the conventional exploration and production universe was also a key objective.
The deal — which is the culmination of months of negotiation that began last fall and was made possible through Hodge’s strong business connections in China — works on both sides because Penn West has joint venture partner with deep pockets, that will not have a seat on the board and is not interested in messing with the operations. As value investors, China Investment has gained access to a resource at the genesis of development, which will also give them insight into the growth process associated with a project of size.
As Nunn points out, it’s a model that is being employed frequently by companies active in the shale gas plays south of the border as a way to manage the capital risk.
But from a broader perspective, the investment, once again, says a number of things about Canada and the oilsands.
China Investment could go anywhere looking for exposure to more oil, but chose to come to Canada because they are comfortable with the political and regulatory climate. Its investment also supports the view that the oilsands are going to play an important role in meeting future world demand.
Judging from some of the chatter about town on Thursday afternoon, the CIC deal is set to be one in a list that is continuing to grow as Chinese companies and investment arms continue to look for deals in Canada’s oilpatch. As one industry exec remarked on Thursday afternoon, there has been no let-up in the number of interest parties from China looking for deals in the oilsands.
“They are cruising around here like crazy.”
dyedlin@theherald.canwest.com
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