China in Canadian Energy Space
For nearly four years, from 2006 to 2009, China made no major investment in Canada, even though in this period China’s energy demand grew rapidly and Chinese energy firms invested heavily around the world. Yet, in the past two years, China has poured well over $16-billion of cash into Canada — and that is counting only the eight largest energy deals alone. What has changed?
Based on my research and the annual Canada-China Energy & Environment Forum I have organized since 2004, eight specific factors explain China’s renewed interests in investing in the Canadian energy sector.
First, the Harper Conservative government changed its hardline policies toward China from early 2009 onward, and repeatedly assured Beijing that Canada welcomes Chinese investment. Such a policy shift is significant since China does not like to do business with politically unfriendly countries, be they democracies or dictatorships. There is a clear, well-documented correlation between Canada’s overall relations with China and the levels of Chinese investment in Canada: Chinese firms did not invest in the Canadian energy sector after the newly elected Conservatives removed China from its foreign-policy priority list. But since late 2009, Chinese money has flowed into Canada with the resumption of Canada-China summit diplomacy and an improved overall political relationship.
Second, the North American stock market has been low since the 2008 economic crisis, presenting buying opportunities for cash-rich Chinese firms and selling pressures for cash-strapped Canadian companies. Take Sinopec’s $2.2-billion purchase of Daylight Energy, the first 100% takeover of a North American energy firm by a Chinese oil company. The offer was $10.08 per share, more than double Daylight’s closing price of $4.59 prior to the announcement. While Daylight shareholders are happy with the generous offer, Sinopec looks for future growth beyond the total it put down. Another case is the nearly bankrupt Opti Canada Ltd., which was bought out by the third-largest Chinese energy company, China National Offshore Oil Corp. Opti was financially bailed out while CNOOC entered a joint-venture arrangement with Nexen Energy to keep the Long Lake project going.
Third, global oil prices remain high, making long-term extraction of oil sands and other Canadian energy resources sustainable and profitable. When Chinese oil majors began to come into Canada’s oil sands in the mid-2000, they were unsure whether the high oil prices represented short-term volatility or if they were there to stay. Plus with Canada’s complex and long regulatory process, high labour cost and lack of access to shipping large volumes of oil to the West Coast, they hesitated and waited. Now, there is enough confidence for oil sands development and the Chinese energy giants have taken their plunge into Canada. Sinopec’s 50/50 joint venture with Total in the Northern Light project is not expected to get to production until early 2020s, but it is moving forward.
Fourth, the ongoing turmoil in North Africa and the Middle East over the past year has taught Chinese investors a painful lesson: Putting your fortune into resource-rich but unstable states or into fast deals with dictators entails higher costs and greater risks. After Libya descended into civil war, the Chinese government had to mount an unprecedented mission to evacuate more than 35,000 of its nationals working in the country, and later, the Ministry of Commerce revealed that in Libya alone, China lost $18-billion in investments and ongoing projects. In a recent conference in Beijing, Zhang Guobao, who just retired as the head of China’s National Energy Administration and still serves as the chairman of the National Energy Security Advisory Committee to Premier Wen Jiabao, made it clear in his speech that countries such as Canada and Australia, both resource-rich and democratic, should top the Chinese FDI list.
Fifth, Canadian energy companies have become more competitive in their engagement with Chinese counterparts. It is true that Canada is richly endowed with energy and other resources while China needs energy and has a $3.2-trillion foreign reserve. And yet these are necessary, but insufficient, conditions for closer Canada-China energy cooperation. Canadian firms have learned that they need to be more assertive in competing with companies from other countries for Chinese investment. Up to three years ago, major Canadian oil producers were largely absent from the Canada-China Energy & Environment Forum. Now they are a major presence at this annual event. Media reports on Chinese investments in Canada have overlooked the fact that Canadians are now more proactive in courting the Chinese energy firms. Although facing many challenges in dealing with an emerging superpower with a different culture, Canadian energy company CEOs, many of whom have never been to Asia before, now fly to Beijing and other Asian capitals to pursue investments, joint ventures and other opportunities.
Sixth, the Chinese energy firms have emerged from the toddler stage to become bolder in conducting merger and acquisition and joint venture activities around the world. All the Canadian subsidiaries of the big three Chinese national oil companies are staffed primarily with technical people in charge of existing local operations. With more experience and better market information, Chinese energy M&A and JV teams are coming to Calgary more frequently. Not only have Chinese firms moved from minority holding positions to full ownership and operator status, as demonstrated by Daylight and MacKay River, they are also diversifying into conventional oil, gas and shale sectors from the large-scale oil sands focus.
Seventh, the growing Chinese interests in Canada’s energy sectors go beyond equity investment and production for profits. All the Chinese NOCs are aiming to become large integrated international companies that can compete with other well-established international oil companies. The management skills and technical know-how of extracting heavy oil and shale that the Canadian firms possess are exactly what the Chinese companies lack. With well over $24-billion invested in Venezuela’s heavy oil exploration and having a domestic shale reserve that is larger than both the U.S. and Canada combined, Chinese energy companies will benefit tremendously from their investment in the Canadian energy sector. Joint ventures with Canadian firms have also given Chinese access to the U.S. energy market, as demonstrated by the recent JV agreements between Nexen Inc. and CNOOC to develop two Gulf of Mexico plays, and the $2.5-billion deal between Devon Energy and Sinopec that gives the latter 30% ownership in five of Devon’s U.S. shale operations.
Finally, Canada’s recent Asian market diversification drive after the U.S. State Department delayed the approval of the Keystone XL pipeline has given Chinese energy companies further incentive to invest in Canada. Although keeping a low profile in the intensifying Canadian debate on building more pipelines to the West Coast, China and other Asian countries hope to have access to Canadian oil and gas in the near future. Sinopec has invested in Enbridge’s $100-million Gateway pipeline regulatory approval fund, as has MED Energy, in which CNOOC has had a stake since 2005.
If most of these conditions remain, and there is little indication that they will change in the short term, we can certainly expect more Chinese investment in Canada’s energy sector. The Chinese have obviously concluded that their investment in Canada is good for China. But are Chinese investments good for Canada? The debate on this question in Canada seems to have just begun.
Source: Financial Post
Wenran Jiang is a political science professor at the University of Alberta, a senior fellow at the Asia Pacific Foundation of Canada and a special advisor on China to the U.S. and Canada-based Energy Council.