A recent report in the Globe and Mail noted that last year China spent a total of US$32 billion investing in the mining and oil industries outside that country’s border. Many investors were taking advantage of depressed prices during the global economic downturn, but the trend is toward continued interest in foreign resources.
The latest Chinese investment in a Canadian oil sands producer is also the largest. State-owned petroleum producer Sinopec has agreed to buy out ConnocoPhillips‘ 9% interest in Syncrude for US$4.65 billion. The Alberta company has plans to build a new two-train mine on the Aurora South leases and debottleneck its upgrader. Those changes would boost production to 600,000 bbl of bitumen per day by 2020.
Note also that this is China’s first investment in a producing oil sands firm. Other investments have been in early stage development projects – 60% of two properties belonging to Athabasca Oil Sands, a 50% interest in Total E&P Canada‘s Northern Lights project, and a 17% share of MEG Energy which owns two potential bitumen producers.
When China Minmetals offered $6.7 billion in a failed bid to buy Noranda six years ago, I called the idea “explosive”. Now it’s on the border of “commonplace”.
The Chinese have a recipe for success in foreign investments. Analysts believe that China is sitting on huge amounts of foreign reserves and surplus cash. The yuan is pegged to the U.S. dollar, but there are signs that it could be allowed to rise, perhaps 2 to 5% this year. Add to that the vigorous Chinese economy and demand for resources to fuel its growth. No wonder China is looking offshore to secure supply.
The Sinopec investment still needs the approval of the Canadian government, but I cannot imagine it will be rejected. The cost of developing growth in the oil sands industry is immense. Investors with deep pockets are welcome.