China invests in Canadian oil sands

Chinese oil producer CNOOC Ltd. grabbed a small piece of Canada’s oil sands industry Tuesday by buying a $122 million stake in a little-known company that has spent the last six years amassing lands for a project.

State-controlled CNOOC bought a 16.69 percent stake in privately held MEG Energy Corp., which is planning a northern Alberta development that would pump 25,000 barrels of crude from the oil sands by 2008, the firms said.

CNOOC’s equity investment in MEG runs counter to energy industry speculation over the past year that a Chinese company would take a major interest in a large producing project.

It will not sell the oil produced at the proposed MEG Christina Lake Regional Project, whose first two phases are expected to cost between C$500 million and C$1 billion ($400 million and $800 million), said MEG’s chief financial officer, Dale Hohm. Instead, it will be an investor in MEG.

“It’s more of a passive investment because it’s not a working interest,” Hohm said.

“I think it’s an important investment for them because of the financial returns that they can generate, and it gives them a toehold in the Canadian oil sands.”

Companies such as Royal Dutch/Shell , Imperial Oil, Suncor Energy  and ChevronTexaco  have been pumping tens of billions of dollars into projects to tap a massive resource that rivals Saudi Arabia’s reserves in size but is much more expensive to produce.

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Developers either mine the tar-laden sand in open pits before separating the oil with hot water and chemicals, or pump the bitumen to the surface with the aid of steam.

MEG plans the latter technique at its site, located south of the oil sands hub of Fort McMurray, Alberta.

China and its three cash-rich state-owned oil majors have been frustrated in efforts to secure production assets abroad at a time when aging domestic fields meet just 60 percent of the country’s fast-growing energy needs.

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CNOOC lost out in the bidding earlier this month for U.S. producer Unocal Corp., which U.S. rival ChevronTexaco agreed to buy for $16.4 billion.

Meanwhile, PetroChina  is planning to buy overseas assets from its Beijing-owned parent, while refiner Sinopec Corp.  is also looking abroad for oil and gas assets.

Record oil prices have generated mountains of cash for oil firms around the world, but have also driven up the cost of acquisitions. Hence the interest in Canada’s oil sands, said UOB Kay-Hian analyst Michael Lee.

Tuesday’s deal makes CNOOC the first mainland China firm to gain a stake in the industry after visits by Chinese government and oil officials to Alberta over the past year.

“These skills may help facilitate the exploitation of oil sand and shale in China,” CNOOC Chairman Fu Chengyu said in a statement.

In January, Enbridge Inc. said it was close to deals with PetroChina and Sinopec to help it build a $2 billion pipeline from the oil sands developments to the Pacific Coast.

Lee said oil prices remaining stubbornly high at over $50 a barrel make it economically viable to develop oil sands, which have at times had all-in production costs above $20 a barrel. That is almost double CNOOC’s costs offshore China of about $11-$12 per barrel.

MEG Energy’s lands have estimated recoverable bitumen reserves of about two million barrels.