Despite a slowdown affecting mostly China’s manufacturing and other value-added, energy intensive industries, China has yet to back down from oil acquisitions. Its newest investment through its state owned investment conglomerate brought thousands of acres of oil sands under its ownership.
Partnership in Sands
The new partnership was reached as part of a deal between Penn West Energy Trust of Calgary and China’s state investment fund. The agreement allows for the development of nearly 240,000 acres of oil sands that currently produce 2,700 daily barrels of oil. China Investment Corp. will invest a total of $817 million to own 45% equity in the partnership, with an extra $435 million being offered for millions of shares in the firm itself.
Why Oil Sands?
Anyone following China’s investment strategy abroad has surely noticed that China appears to prefer high-cost oil operations rather than typical low-cost, high reward oil investments. Since the oil is locked deep in the oil sands, the production cost is fairly high, meaning China only stands to benefit should oil costs keep rising. This kind of investment is indicative of a hedging strategy against rising oil prices, as well as a strategy of locking in the future supply. Since many oil sands are unprofitable at low oil prices, most won’t be developed until prices near their historic peaks. Once they do, China will own much of the new, now cost effective, production methods, enabling itself to generate and refine its own energy at its own agreed upon pricing.
PetroChina is Active too
Oil superstar PetroChina, a publicly-listed firm largely owned by the Chinese government, is also incredibly active on the merger scene, particularly in oil sand development. The firm recently reached an agreement with Syncrude to purchase 9% of the company and its oil sand assets for $4.65 billion. PetroChina has also been a large financier for new oil sand development as opposed to purchasing existing businesses. The company paid $1.9 billion for 60% equity in two projects planned by Athabasca Oil Sands Corp that were not yet in operation at the time, which was just one year ago.