The Emperor’s Reach into Canada (and Will He Pull Anything Back?)

November 15, 2013 By

August 1, 2012

By Leigh Noda

Stillwater Associates has been closely following the Mid Continent Crude Oil Bubble which is being fed by the growing volumes of Bakken and Canadian crudes. Although almost all of the exported crude from Western Canada is destined for the United States, if either or both of the proposed pipelines get built to the West, there will be a strong linkage to East Asia.

On July 23, China National Offshore Oil Corporation (CNOOC) agreed to purchase Nexen, Inc. for US$15.1 billion. The purchase is subject to regulatory approval. The move to purchase the Canadian oil and gas producer is the latest in a string of investments by China’s oil companies.

Canada has been an investment target for China’s three largest oil companies, China National Petroleum Corporation (CNPC), China Petroleum & Chemical Corporation (Sinopec) and CNOOC. The pace of activity has been picking up and without this latest announcement more than C$11 billion has been spent. In 2010, Sinopec purchased a nine percent equity stake in the Syncrude project for $4.65 billion from ConocoPhillips, and in 2011 purchased Daylight Energy Ltd. for C$2.2 billion. In addition Sinopec partners with Total in the Northern Lights Oil Sands project. In 2010, CNPC made a $1.9 billion investment into two heavy oil projects with Athabasca Oil Sands Corporation and earlier this year became the sole owner of one of the projects after purchasing Athabasca’s interest in the MacKay River project for C$680 million. In November 2011, CNOOC acquired for C$2.1 billion, Opti Canada Ltd which had a 35 percent stake in the Long Lake oil sands project. The other 65 percent is owned by Nexen.

When the Nexen purchase is complete, 100 percent of the Long Lake operation will be controlled by CNOOC. With Long Lake and the MacKay River project, the Chinese companies move from equity interests to operatorship of oil sands assets. The investments in these resources for now are part of the growing international portfolios for these companies. Whether these assets become a significant crude source for China will depend upon whether the logistics to the Pacific become a reality.

At Stillwater Associates, we have been reviewing China’s refining system to understand its capability for heavy crudes. The refining system in China has been dynamically changing over the past fifteen years with a great emphasis on having the capability to process foreign grades of crude. The Pacific Basin is short on crude oil and it attracts crude oil from all over the globe to supply its growing needs. With Chinese refining capacity expected to be over 15 million barrels per day by 2016, this may very well be a future home for Canadian crudes if there are logistics to support exports to the Pacific.