Chinese buying spree bypasses Canada

By Deborah Yedlin
Calgary Herald
July 15, 2009

If anyone doubts China's growing need for energy and its continued quest to shore up supply, having a look at the activity of its national energy companies on the international stage will put those thoughts aside.

What's curious, however, is that none of those deals has taken place in Canada.

The only possible exception could be the $1.5-billion US investment by the China Investment Corp. in mining giant Teck, which amounts to a 17.2 per cent interest in the company.

What's relevant here is that Teck also holds a 20 per cent interest in the Fort Hills oilsands project owned by Petro-Canada.

Since February--as oil touched $33-per-barrel lows--China has gone on a bit of a buying spree to shore up its oil supply. It made "loans for oil" deals in Brazil and Russia and has been an active buyer through its various oil companies.

Last month, Sinopec said it was going to buy Toronto-listed Addax Petroleum for $8.8 billion.

Meanwhile, the China National Petroleum Corp. is still waiting to hear whether its $430-million deal to buy Calgary-based Verenex, with its Libyan assets, will proceed or end up in Libyan hands.

Of the biggest 10 deals done in the second quarter, Chinese companies were associated with three of them.

And it doesn't end with interest in the upstream side of the business. The downstream is turning out to be just as important.

There are reports Chinese companies are looking at investing in Iran's oil refining sector, PetroChina recently bought a 45.1 per cent interest in Singapore Petroleum Co. to gain access to its refining arm and just received approval to invest in Japan's key refiner, Nippon Oil.

But the reality is that since 2005, when Sinopec bought into the Synenco Northern Lights Project --now owned by Total-- and the Chinese National Overseas Oil Co. bought the 16.69 per cent interest in MEG Energy-- the Chinese have been conspicuously absent from Alberta's oilpatch.

And according to Wenran Jiang, associate professor of political science and the Mactaggart research chair of the China Institute at the University of Alberta, there are a number of reasons for this apparent lack of activity.

"There's been more thunder but little rain," said Jiang.

"Are they interested? Yes, but there are four or five factors that make Canada less desirable relative to other jurisdictions."

One of those factors is the lack of pipeline infrastructure to the west coast that could see the export of oilsands production to China and other countries in the Far East. Jiang makes reference to the memorandum of understanding signed with Enbridge back in 2005 in connection with the Gateway Pipeline, but it's been almost four years since that time and the pipeline has yet to be built.

"Having that pipeline from Edmonton to the west coast would be good for Canada and Alberta because it represents diversification in terms of who buys the oil," said Jiang.

Another is the fact that the oilsands remain the marginal barrel on the world's oil stage.

"The Chinese want to know what happens to the economics of the oilsands if the price falls to $40 per barrel," he says.

This relates to another strike against Alberta's oilsands--the cost of labour and other inputs that push up the price of getting oil out of the bitumen.

One of the ways the Chinese have suggested mitigating the cost side of the equation would be by bringing in contract labourers from China. A lower cost structure through cheaper labour, notes Jiang, would be one way to insulate the oilsands from being so vulnerable to the world oil price.

Then there's the political environment. Alberta might be keen to attract investment, but this enthusiasm doesn't necessarily translate at the federal level. While other countries are interested in luring the dragon to their doorstep, says Jiang, Canada is ignoring it.

This despite the fact it is becoming increasingly apparent that, in addition to the U. S. recovering from the recession, from a Canadian perspective, it's just as critical that China gets its economy rolling, too.

The reason is simple.

"As China recovers, so do the prices for metals and other natural resources. And that's important for the Canadian economy. Canada needs the Chinese more than the Chinese need Canada," said Jiang.

The irony in all this is that Chinese companies have been eager buyers of assets being sold by Canadian companies outside the country. Since 2005, Chinese companies have been buyers of assets sold by EnCana and Petro-Canada, have bought Addax Petroleum, bid for Verenex and also swallowed PetroKazakhstan.

"The Chinese are buying assets in Africa, the Middle East, Southeast Asia and Latin America," said Jiang.

But not here.

And despite more attractive valuation metrics, it's clear there is much more to this story than simply commodity prices.

The combination of regulatory challenges, a tepid political climate at the federal level, the higher relative cost of an oilsands barrel and the inability to get it out of the country all suggest that until there are some positive shifts in these areas, the Chinese companies are going to keep buying assets of Canadian energy companies with assets overseas. The question that needs to be asked is if this is in the best interest of the Canadian economy.

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