Political stability against the backdrop of Middle East risk has convinced Sinopec and others to invest in Canadian energy

Daylight Energy is a Toronto-listed, conventional oil and shale-gas supplier with productive fields in Alberta and British Columbia, and a headquarters in Calgary.

But soon, if shareholders and regulators agree, this Canadian-as-a-maple-leaf company will become a wholly owned unit of the Chinese oil giant Sinopec, whose subsidiary Sinopec International Petroleum Exploration and Development Co. in October offered to buy Daylight for C$ 2.2 billion.

Under the deal, which could close by the end of the year, state-owned Sinopec would pay a 43 percent premium to the company’s recent average share price, according to Daylight. Yet the buyer would get a company that reported a revenue decline for the first three quarters of 2011, compared to the same period last year.

Sinopec’s readiness to pay a steep price at a slow time for Daylight reflects an attitude toward Canadian energy interests that’s shared by other major Chinese oil companies: They want stable and diverse sources of energy for China, and Canada offers both.

It’s an evolving attitude understood by Canadian Natural Resources Minister Joe Oliver, who spoke to Caixin in Beijing on November 8.

“From an investment and business perspective, and from a strategic perspective, Chinese companies have ample reason to invest in Canada,” Oliver said.

Canada is home to the world’s second-largest oil reserves, behind only Saudi Arabia, with more than 180 billion barrels of proven reserves as of 2009, according to the International Energy Agency (IEA).

About 95 percent of these reserves can be found in Canada’s vast oil sands, which are extractable mixtures of sand, clay, asphalt and water mainly found in Alberta and Saskatchewan that, when processed, yield the black gold every nation wants.

Tracts of Canadian oil sands were targets for about half of all overseas mergers and acquisitions by Chinese companies last year, in step with a global trend that, according to IEA, saw investment in oil sands jump 12 times in just a decade to C$ 18.1 billion in 2007.

According to a China National Petroleum Corp. (CNPC) report, Chinese oil companies invested US$ 10 billion overseas this year through October – nearly half of it in Canada, and much of that in oil sands projects – as well as US$ 30 billion last year.

It’s unclear how much economic benefit Chinese companies may derive by investing in Canadian energy companies, especially oil sands, which require costly processing methods that have raised environmental concerns. Thus, some experts think the decision to push into Canada was not only based on the basic business interests of Chinese companies, but also wedded to a resource access strategy combined with delicate geopolitical maneuvering.

What appears certain, nevertheless, is that China’s major oil companies have made oil sands and other energy pursuits in Canada a top priority.

Canada Calling

Sinopec announced its Daylight buyout plan around the same time that shareholders for CNPC heard the state-owned oil giant’s Chairman Jiang Jiemin announce that the company would seek future opportunities in Canada as well as Australia and other resource-rich yet politically stable regions.

Moreover, Oliver’s visit to China that same month for the 2011 China International Mining Conference in Tianjin was aimed at promoting bilateral energy cooperation. He met with several senior oil executives including Sinopec Chairman Fu Chengyu and China National Offshore Oil Corp. (CNOOC) Chairman Wang Yilin.

In speaking with the Chinese executives, Oliver said he stressed China’s role as one of Canada’s most important energy trading partners. And the executives, he told Caixin, told him they consider Canada an attractive investment destination with abundant natural resources and low tax rates, as well as a fair regulatory system, political stability and a friendly attitude toward foreign investment.

Wu Mouyuan, an expert at CNPC’s Foreign Investment Environment Research Institute, said 80 percent of overseas merger and acquisition spending by Chinese oil companies last year went toward projects in North and South America, including oil sands in Canada, shale gas in the United States, and deep-water oil and gas in South American countries.

The investing has continued this year. CNOOC in July bought a Canadian oil sands company called OPTI for US$ 2.1 billion, and in 2005 a 17 percent in Canadian MEG Energy Corp.

In May, Sinopec paid ConocoPhillips some C$ 4.7 billion for a 9 percent stake in its Canadian Syncrude unit, and CNPC in December 2009 bought 60 percent of the Athabasca Oil Sands Corp.

Even a non-energy Chinese concern – the government’s sovereign wealth fund China Investment Corp. – has gotten involved in Canadian oil sands: The fund invested C$ 1.2 billion in a joint venture with Canada’s Penn West, one of the largest conventional oil and natural gas producers in Canada, in May 2010.

The Sinopec bid for Daylight marked another milestone, said Jiang Wenran, a professor at Canada’s Alberta University. If finalized, he said, it would be the first 100 percent takeover of a Canadian company by a Chinese concern.

Chinese oil companies that invest in Canadian oil sands also have one eye on the United States, for which Canada plays an important national energy security role. The United States currently imports 20 percent of its crude oil from Canada – more than any country in the Middle East, according to Jiang– and half of the oil and gas extracted from Canadian fields is exported to the U.S. market.

Jiang noted Alberta’s oil and gas are shipped via north-south pipelines through the United States, since there are no east-west pipelines in Canada. That would change if Canada’s largest pipeline company, Enbridge, builds a proposed US$ 5.5 billion network across 1,172 kilometers from Alberta to the Pacific coast, with a daily capacity of 525,000 barrels. The pipeline would supply China-bound ships, although a timetable for construction has not been set.

Oliver told Caixin the pipeline would “pull oil sands and oil to ports in British Columbia to be loaded on boats and transported to China.”

Oliver said he hasn’t heard any complaints from the Americans about the proposed east-west pipeline. “Canada’s oil resources are currently greater than American demand,” he said, noting a separate proposal is now on the table for a new pipeline between central Canada and the United States.

“We hope it can gain the approval of the U.S. government,” Oliver said. “The two current pipeline projects are not mutually inconsistent. We hope the two projects can both gain approval.”

Risk Assessments

Jiang said Chinese oil executives he’s met at recent Sino-Canadian energy conferences have raised questions about the political risks of investing in the Middle East and North Africa.

“We have always known about the risks,” he said. “But after the political upheaval in these regions this past year, we have started to think that we should focus investment in more politically stable countries or regions.”

A Sinopec official in charge of exploration and development research projects told Caixin his company has changed its overseas transaction strategy under Fu, who is well-versed in overseas buyouts , by sharing risk with partners through cooperation plans and equity investing.

Most recent transactions by Chinese companies in Canada involved minority stake purchases, such as Sinopec’s purchase of a stake in Syncrude.

Canada’s oil sands sector includes numerous companies both large and small; no national oil company dominates in the country. IEA says the Canadian Petroleum Producers Association has more than 100 member companies, and foreign shareholders control about half of the largest concerns. In addition, about 450 mainly domestic companies are members of a separate industry group called the Small Explorers and Producers Association of Canada.

Like Daylight, most of these domestic energy companies are listed on the Toronto Stock Exchange.

Jiang said the Daylight deal could mark the start of Chinese involvement in oil and natural gas assets through 100 percent share acquisitions. Oliver said he expects regulators to approve the deal.

“Looking at the past 15 years, only two of more than 1,200 transaction applications have been rejected” by Canadian regulators, Oliver said. “All others have been given the go-ahead. It could be said that not gaining approval would be a very exceptional event.”

By staff reporter Wang Xiaocong