Canadian Energy Research Institute

Foreign Investment in the Oil Sands and British Columbia Shale Gas

Jon Rozhon

March 2012

Relevant • Independent • Objective

Foreign Investment in the Oil Sands and British Columbia Shale Gas 1

Foreign Investment in the Oil Sands

There has been a steady flow of foreign investment into the oil sands industry over the past decade in terms of merger and acquisition (M&A) activity. Out of a total CDN$61.5 billion in M&A’s, approximately half – or CDN$30.3 billion – involved foreign companies taking an ownership stake. These funds were invested in in situ projects, integrated projects, and land leases.

As indicated in Figure 1, US and Chinese companies made the most concerted efforts to increase their profile in the oil sands, investing 2/3 of all foreign capital. The US and China both invested in a total of seven different projects. The French company, Total SA, has also spread its capital around several projects (four in total) while Royal Dutch Shell (UK), Statoil (Norway), and PTT (Thailand) each opted to take large positions in one project each. Table 1 provides a list of all foreign investments in the oil sands since 2004.

Figure 1: Total Oil Sands Foreign Investment since 2003, Country of Origin

Korea 1% Thailand Norway 6% UK 7% 2% US France 33% 18% China 33%

Source: Canoils.

Foreign Investment in the Oil Sands and British Columbia Shale Gas 2

Table 1: Oil Sands Foreign Investment Deals Year Country Acquirer Brief Description Total Acquisition Cost (000) 2012 China PetroChina 40% interest in MacKay River 680,000 project from AOSC 2011 China China National Offshore Acquisition of OPTI Canada 1,906,461 Oil Corporation 2010 France Total SA Alliance with Suncor. Voyageur 1,751,250 Upgrader; Fort Hills 2010 Thailand PTT Exploration and 40% interest in Kai Kos Dehseh 2,225,173 Production (PTTEP) project from Statoil 2010 France Total SA Acquisition of UTS Energy Corp. 1,145,000 2010 China China Investment 45% interest in JV with Penn West 817,000 Corporation to develop resources 2010 China Sinopec Corp. 9.03% interest in Syncrude from 4,538,181 ConocoPhillips 2010 US Devon Energy 50% interest in Pike oil sands leases 634,369 Corporation from BP; form JV with BP for Pike 2009 US ExxonMobil Acquisition with Imperial -- 50% of 125,000 UTS oil sands lease 421 2009 China PetroChina International 60% interest in AOSC’s MacKay 1,900,000 Company Ltd. River & Dover oil sands projects 2008 US Occidental Petroleum Acquisition of Enerplus' 15% 489,387 Corporation working interest in Joslyn oil sands. 2008 France Total SA Acquisition of Synenco Energy Inc. 541,000 2007 US Marathon Oil Corp. Acquisition of Western Oil Sands, 6,495,065 Inc. 2007 Norway Statoil ASA Acquisition of North American Oil 1,951,906 Sands Corporation 2006 US Surge Global Energy Acquisition of Peace Oil Corporation 9,144 Inc. 2006 US ConocoPhillips JV with Encana to develop 2,635,073 integrated North American Heavy oil business 2006 UK Royal Dutch/Shell Acquisition of 5 parcels of oil sands 101,200 land from public offering 2006 Korea Korea National Oil Acquisition of BlackGold Oilsands 264,483 Corporation 2006 UK Royal Dutch/Shell Acquisition of 1 parcel of oil sands 5,100 land from public offering 2006 UK Royal Dutch/Shell Acquisition of 10 parcels of oil sands 465,000 land from public offering 2005 France Total SA Acquisition of Deer Creek Energy 1,674,000 Limited 2005 China Sinopec Corp. 40% interest in Northern Lights 149,700 Partnership 2005 China China National Offshore Acquisition of 16.69% of MEG 119,720 Oil Corporation Energy Corp. shares 2004 Japan Inpex Acquisition of 3.1% of Canada Oil 3,803 Sands Co., Ltd. Source: Canoils.

Foreign Investment in the Oil Sands and British Columbia Shale Gas 3

Figure 2 indicates the total sums of money committed by foreign investors per year since 2003. It also shows the yearly WTI average price. Investment levels in general over this period reflect the price of crude oil. Note the general rise in investment as the oil price rose from 2003 to 2007. As the price of oil fell dramatically in 2008, foreign investment also declined. With the subsequent recovery in the oil price came renewed foreign commitment to the oil sands. One conclusion that can be drawn from this is that foreign investors made their financing decisions based primarily on market conditions and oil prices.

2011 was an anomaly. The price of oil continued to rise. But only the Chinese invested in the oil sands that year, likely reflecting a continuing lackluster global economy and uncertainty concerning bitumen transportation issues. The transportation issues, in particular, will take some time before they are ironed out. With the TransCanada Keystone XL pipeline being cancelled, at least temporarily, and with the long Enbridge Northern Gateway public consultation process just getting underway, it could be several years before there are significant increases in oil sands product moving to offshore markets. Other factors such as country risk, a major consideration in other parts of the world, were not of primary importance as Canada has been and continues to be one of the world’s more stable countries in which to invest.

Figure 2: Oil Sands Foreign Investment and Oil Price

12 120

10 100

8 80

6 60

$/barrel

Billions 4 40

2 20

0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (Jan 1 to Mar 6) Foreign Investment WTI Yearly Avg. Price

Source: EIA, Canoils.

Canada’s relative stability compared to other oil producing nations is underscored in Figure 3. The figure shows the 10 largest oil producers in the world in 2010 and the level of country risk that Euromoney – one of several organizations that track country risk levels – assigns to each of these

Foreign Investment in the Oil Sands and British Columbia Shale Gas 4

producing nations. Of these producing countries, Canada demonstrates the lowest degree of country risk.

Figure 3: Country Risk of Major Oil Producing Nations

Sources: BP Statistical Review of World Energy; Euromoney

Source: BP Statistical Review of World Energy, Euromoney.

It is notable that the proposed Northern Gateway pipeline has received support from abroad; this pipeline, if and when it is built, would represent an additional 500,000 bpd of additional oil sands crude bitumen available to world markets via the British Columbia port of Kitimat. In 2007-2008 a total of ten foreign companies were each sold $10 million shares in the project. Each shareholder is entitled to an option to purchase equity stakes in the pipeline in the future.1 Not all foreign supporters of the project have been announced, but Enbridge has acknowledged that Sinopec of China is one that is involved2. With Sinopec also purchasing a 9% interest in Syncrude in 2010, the company is poised to extract and ship additional Canadian bitumen to China in the future.

1Tait, Carrie. “Sinopec teams up with Enbridge for Northern Gateway pipeline” Financial Post. January 18, 2011. http://www.financialpost.com/news/energy/Sinopec+teams+with+Enbridge+Northern+Gateway+pipeline/4128351/story.html

2 Five other companies have been announced as financial backers: Cenovus Energy, Nexen, Suncor Energy Marketing, Total E&P Canada, and MEG Energy.

Foreign Investment in the Oil Sands and British Columbia Shale Gas 5

Foreign Investment in the Montney and Horn River Shale Gas Plays

Foreign investment in the shale gas plays of northeastern British Columbia did not occur until 2007 when Murphy Oil of the US invested $141 million in the Montney shale. Shell followed in 2008 with a $6 billion purchase of Duvernay Oil Corporation – a company with various oil and gas holdings and a significant acreage holder in the Montney. 2011-12 has seen a flurry of activity, with four major Japanese companies/utilities taking minority positions in Penn West’s Horn River operations, and both Petronas (Malaysia) and Sasol (South Africa) investing over $1 billion in Montney plays (see Figure 4). Most recently, the Chinese company Sinopec, purchased Calgary-based Daylight Energy for $2.5 billion, acquiring that company’s diversified oil and gas holdings, including a presence in the Montney Shale.

Figure 4: Total Horn River and Montney Foreign Investment since 2008, Country of Origin

Korea US Malaysia 8% 3% 10%

South Africa 29% Japan 45%

Shell's (UK) purchase of Duvernay in 2008 and Sinopec's (China) 2011 purchase of Daylight are not included here as these transactions were general corporate acquisitions rather than specific Montney asset purchases.

Source: Canoils.

Foreign investment in BC shale gas has not come as a result of rising prices; in fact, for several years, gas prices in most parts of the world have decreased from mid-decade highs. However, technological advances have brought down production costs in shale areas in general, resulting in high levels of activity in the US Barnett and Marcellus shales – areas in close proximity to markets and benefiting from developed transportation infrastructure. Horn River and Montney do not yet have a high degree of transportation infrastructure development, and their relative distance from markets is an additional disadvantage. Therefore, the foreign investment in these two Canadian shales is still relatively modest. It should be noted, though, that Japanese and Malaysian firms have recently invested in these areas; East Asian markets pay premiums for their natural gas, and the extra expense of Canadian natural gas

Foreign Investment in the Oil Sands and British Columbia Shale Gas 6

has not deterred investment from the region. Again, low country risk is one reason for this: foreign firms are willing to invest in Horn River and Montney – knowing that Canada offers a stable investment environment – even though these areas are still in the early stages of development.

A notable absence, until recently, has been Chinese investment in Montney and Horn River. Chinese companies have demonstrated interest in these areas, and it appears that it is only a matter of time before their presence will be felt in a large way. In fact, PetroChina had agreed in February 2011 to invest $5.4 billion, taking a 50% stake in EnCana’s Cutbank Ridge project in the Montney shale. However, the deal fell through in June 2011 when the two parties could not agree on the terms of the joint operating agreement. Sinopec’s October 2011 purchase of Daylight Energy will provide to the Chinese entity a foothold in the Montney Shale, as Daylight holds drilling rights in the area. PetroChina are also now involved, taking a 20% share in Shell’s Groundbirch project in early 2012. With a number of natural gas producers seeing their share prices dropping of late, low industry P/E ratios indicate that further acquisitions are increasingly likely.

US companies may also be considering M&A moves, though lately there has not been much American investment north of the border. Early on, US firms became involved with shale gas development in British Columbia but that investment tapered off – likely because of preoccupations with the shale gas rush that has been going on at home in areas like the Barnett shale in Texas and the Marcellus shale in Eastern US.

It should be noted that there are other reasons, not necessarily directly related to the bottom line, for foreign investment in Canadian shale gas plays. For example, an important reason why South Africa- based SASOL jumped into Montney with both feet in 2010-11 was to establish a proving ground for its proprietary Gas-to-Liquids technology (http://www.ogj.com/articles/2011/03/talisman--sasol- deepen.html). Likewise, Sinopec’s purchase of Daylight represents for the Chinese company an excellent technology transfer opportunity. Daylight has developed expertise in horizontal drilling technology – valuable experience gained within Alberta’s Pembina oil field and the company’s BC shale gas holdings. China’s domestic shale gas resources are vast and undeveloped; learning from its Canadian operations will help Sinopec to unlock Chinese domestic natural gas potential. Finally, in the wake of the Fukushima nuclear disaster, with all but two of its nuclear plants shut down, Japan is looking to add more gas to its energy mix3; thus, Mitsubishi made a major move into Montney in early 2012, spending almost $3 billion for its 40% share of Encana’s Cutbank Ridge.

Figure 5 shows the relationship between foreign investment and number of deals in Horn River and Montney. As development is still in the early stages in both of these areas, it is too early to draw conclusions. However, it is notable that the number of deals occurring has picked up over the past two years, with the majority of these deals involving Asian companies and utilities. This indicates that Asia regards Horn River and Montney in an increasingly favorable light as technologies improve, pipelines

3 http://www.nytimes.com/2012/03/09/world/asia/japan-shutting-down-its-nuclear-power-industry.html

Foreign Investment in the Oil Sands and British Columbia Shale Gas 7 and other infrastructure are built, and supply remains tight in the home countries. All Horn River and Montney foreign investment deals over the past four years are listed in Table 2.

Figure 5: Horn River/Montney Foreign Investment and Number of Deals

3.5 8

3.0 7

6 2.5 5 2.0 4 1.5 3

1.0 of Number deals 2 0.5 1 Investment total (CDN$Billions) total (CDN$Billions) Investment 0.0 0 2007 2008 2009 2010 2011 2012 (Jan 1 to March 8) Investment No. of deals

Source: Canoils.

Foreign Investment in the Oil Sands and British Columbia Shale Gas 8

Table 2: Horn River and Montney Shale Foreign Investment Deals

Year Country Acquirer Brief Description Total Acquisition Cost (000)

2012 Japan Mitsubishi 40% share in Encana’s Cutbank Ridge 2,900,000

2012 China PetroChina 20% share in Shell’s Groundbirch project --

2011 China Sinopec Purchases Daylight Energy Ltd., a deal 2,893,755 (corporate which includes Shale gas holdings – acquisition) Montney

2011 Malaysia PETRONAS 50% interest in Progress Energy's Altares, 1,070,000 Lily & Kahta properties – Montney

2011 Japan Japan Oil, Gas Indirect 7.5% interest in Mitsubishi's farm- 75,000 and Metals in agreement with Penn West -- Horn River National Corporation

2011 Japan Chubu Electric Indirect 7.5% interest in Mitsubishi's farm- 75,000 Power Co., Inc. in agreement with Penn West – Horn River

2011 Japan Tokyo Gas Co., Indirect 7.5% interest in Mitsubishi's farm- 75,000 Ltd. in agreement with Penn West – Horn River

2011 Japan Osaka Gas Co., Indirect 7.5% interest in Mitsubishi's farm- 75,000 Ltd. in agreement with Penn West – Horn River

2011 South Sasol Limited 50% interest in Talisman's Cypress A assets 1,034,000 Africa – Montney

2010 South Sasol Limited 50% interest in Talisman's Farrell Creek 1,025,000 Africa assets – Montney

2010 Korea Korea Gas 50% interest in EnCana's Horn River Shale 565,000 Corporation and Montney acreage

2009 US ExxonMobil Acquire with Imperial 113,120 acres in BC 56,597 land sale

2008 UK Royal Dutch/Shell Acquires Duvernay Oil Corp. – Montney 6,279,367 (corporate acquisition)

2007 US Murphy Oil Tupper Region -- Montney 141,052 Source: Canoils.