China not exactly striking it rich in Canadian oilpatch

The Chinese-owned Long Lake facility in Alberta's oilsands could be shut down for a few years after a fatal explosion in January. The ongoing investigation represents another setback for Nexen and for Chinese investment in the Alberta oilpatch, to the extent some experts wonder whether China has any interest left in Canadian resources.

'There's been a lot of headwinds combined with paying a high price and not managing the assets as best as they could' - Lanny Pendill, oilsands analyst

Calgary-based Nexen was purchased by China's CNOOC Ltd. in July 2012 for $15.1 billion in cash. Nexen had assets around the world, but the Long Lake project was the centrepiece of the deal as China was looking to gain a foothold in the Alberta oilsands. 

Long Lake had a history of problems as it tried to live up to its production targets and the struggles continued as the facility moved into Chinese hands.

"On a cash cost basis they would have been struggling even without the shut in," said Kevin Birn, an oilsands analyst with the IHS Energy Group. "It's not very pretty. Nexen is backed by one of the world's largest oil companies, so it's not a threat to the stability of the company, it's how do they feel about that asset over the long term."

Fatal explosion, pipeline leak

The recent problems at Long Lake began with a pipeline spill in July when five million litres of bitumen, sand and oil leaked from a pipe at the facility. The plant had to temporarily shut down.

In January, one worker was killed and another was critically injured after an explosion at the facility's hydrocracker. Ever since, the facility has reduced its production dramatically. 

Long Lake explosion

The view from a helicopter of the gas compression building in the hydrocracker unit after an explosion killed one worker and critically injured a second. (CBC)

Occupational Heath and Safety (OHS) is investigating the explosion and has a stop work order for an area of the facility where the fatal explosion occurred. The investigation could take up to two years and OHS may recommend crown prosecutors lay charges against the company.

Currently, the facility is allowed to produce about 20,000 barrels of oil a day compared to the facility's capacity of 70,000 barrels a day. 

"It's the minimum level necessary to keep the bitumen in the lines from solidifying and it allows the entire facility to remain at a near idle state until they are authorized to go back into full production," said Riley Bender, a spokesman with the Alberta Energy Regulator.

Nexen did not respond to several requests for comment.

Big price, little profit

CNOOC's purchase of Nexen was good news for Nexen shareholders. They received a 61 per cent premium over the share price when the deal was announced.

"It was almost like a white knight coming in and paying a fairly decent price relative to the price of Nexen at the time," said Lanny Pendill, a senior analyst with Edward Jones. 

But, four years later, industry watchers consider the deal a financial blunder for CNOOC.

Long Lake has been considered one of the most carbon intensive oilsands projects, which likely does not bode well since the Alberta government's carbon tax will come into effect at the start of 2017. 

Oilsands GHG intensity per barrel

Oilsands GHG intensity per barrel (CBC/Government of Alberta)

Oilsands projects are complex, energy intensive facilities that use high temperatures to extract bitumen from the ground. Pendill suggests part of the issue is the "direct result of CNOOC starting to manage the business," without oilsands experience.

China's interest flagging

The deal isn't regarded favourably in China, either.

"Today, most people view that as a failure," said Edy Wong, an associate dean at the University of Alberta, who studies international business. "They overpaid for the asset and they have not been able to do very well."  

Purchasing Nexen allowed CNOOC to diversify its assets, but Wong said this deal is like many other Chinese investments in the Alberta oilpatch — the revenues have not met expectations.

"From the perspective of state companies, the large enterprises, Canada is probably not considered to be a very attractive destination," he said. "Companies like CNOOC, Sinopec, etc — Canada has not worked out very well for them and consequently, they are not looking to Canada as a place where they will increase their investment in the near future."

Wong suggests Chinese companies are having much more financial success from operations in Africa, central Asia and to a lesser extent in South America.

"When we look at a lot of the medium sized companies from China, who have invested in [Canadian] junior oil companies, most have not turned a profit. The rate of return for even the big companies, it's not there," he said.

The reason Chinese investments haven't always paid off is because of several factors. Many deals occurred when oil prices were high and there have been two downturns in the last decade.

"Unfortunately the Chinese did a lot of deals before the last crash in 2009. There has been a recovery but now another crash," said Pendill, the Edward Jones analyst. "There's been a lot of headwinds combined with paying a high price and not managing the assets as best as they could."

Future investment

The poor track record of Chinese investment in the oilpatch raises questions about whether there will be any more buying in the coming years. Concerns about whether any export pipelines will be constructed is another reason why future investment is not a sure thing.

Still, Pendill is not ruling it out.

"I don't think the Chinese are done, even inside Canada and the oilsands," he said.

China's population keeps growing and so does its demand for energy. It must look outside its borders to supply its needs for decades to come.

"Hopefully they've learned from their mistakes and those future investments will turn out better than past investments have."  

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