PetroChina takes $1.9-billion stake in oil sands

Carrie Tait, Financial Post

AFP/Getty Images

CALGARY — China, using its significant financial firepower, snapped up majority stakes in two oil sands projects Monday in a way experts say illustrates the energy-hungry country’s strategy to convince Canada it can be a palatable and necessary partner in the huge crude reserves buried in northern Alberta.

PetroChina International Investment Co. Ltd. has struck a deal to buy a 60% interest in Athabasca Oil Sands Corp.’s MacKay River and Dover projects for $1.9-billion, as well as other financing arrangements.

This marks a significant move for China in the enormous reserves, and gives the country — of which many in the oilpatch are still wary — the chance to prove it can be a non-threatening partner.

“China’s strategy is to take bite-sized portions initially to get an understanding of [Canada’s] business practices… [and] to give the government a sense China will be a good corporate citizen,” said Mike Percy, dean of University of Alberta School of Business, who Monday returned to Canada from a business trip in China. “By taking over a private company, it gives you the platform to demonstrate you respect existing rules and regulations.”

Ottawa has hinted it will exercise its power to protect Canadian resources should foreign companies try to take over assets important to the country’s security. Bill Gallacher, chairman of AOSC, said while his company gave the provincial and federal governments a heads-up that a deal was on the way, he is unsure which regulatory hurdles have to be cleared.

“We know there will be some [regulatory approvals needed], but we just don’t know which ones,” he said.

PetroChina’s 60% interest is only in the AOSC’s MacKay River and Dover projects, not the entire privately held company. PetroChina’s stake translates into it controlling roughly three billion barrels of recoverable bitumen, the tar-like mix of crude and sand that is processed into useable products such as gasoline and jet fuel. AOSC, therefore, is left with about seven billion barrels of recoverable bitumen. The Calgary-based company will continue on as the projects’ operator.

AOSC, which expects the MacKay River project to hit commercial production in 2014, originally planed to sell up to 50% interest in the two projects, but PetroChina wanted a larger stake.

“This is a very bullish partner,” said Sveinung Svarte, AOSC’s chief executive. “It wants to make sure development will happen, and access large resources worldwide.”

The two projects will need roughly $15-billion to $20-billion in investment to get to production of about 300,000 and 500,000 barrels per day, Mr. Gallacher said. Further, the projects will need “sustainability capex, which will probably be a multiple of that.”

But the PetroChina deal gives AOSC the cash it needs to fund the in-situ projects. The AOSC’s business plan is now financed “in perpetuity,” Mr. Gallacher said.

Eric Newell, who led Syncrude Canada Ltd. for 14 years, welcomed the news because it comes with cash as well as brainpower, but he said he remains nervous about China owning significant stakes in the oil sands.

“I don’t see anything sinister in [China] buying up pieces of it, because they have ownership in oil and gas all over the world, and that’s fine,” he said in an interview. “But my concern would go to if they actually owned to the extent we were not able to control the development of our own resource.”

PetroChina is also trying to buy Verenex Energy Inc., a publically traded company with assets in Libya. The Chinese energy giant, however, is being stymied by the Libyan government, which has the ability to trump any Verenex suitors. In the oil sands, Sinopec owns a 50% stake in a project controlled by France’s Total SA, and CNOOC Ltd. paid $150-million for a 16.6% stake in MEG Energy Corp. in 2005.

House starts signal reviving economy

Quebec a bright spot

Jay Bryan, Canwest News Service

Canada’s home builders gave this country’s recovery an unexpected boost in August, laying foundations for new homes at a surprisingly vigorous annual pace of 150,000 units. That was up a hefty 12% from July.

Of all the good economic surprises we’ve seen recently, this is one of the more important, since housing construction is an activity that’s exceptionally powerful fuel for economic growth.

Not only does a new home require more local labour and more Canadian-made materials than a new car or television set, but its owners are likely to spend still more on furnishings and landscaping in the months after their purchase, stretching out the impact on economic growth.

Quebec was one of the more notable bright spots in a generally positive national picture. Although most regions showed gains, Quebec was the only one where August housing starts were actually above their year-ago level.

That’s partly because of a substantial revival in Quebec, but mostly because its housing starts never slumped as severely as in neighbouring Ontario, whoseautoindustry virtually collapsed early this year, or in British Columbia, where a housing bubble deflated during last winter’s financial panic.

Ontario was the only region to see no upturn in August, with construction remaining mired at about half the level of a year ago.

But this weakness won’t last much longer, predicts economist Marco Lettieri at National Bank. Now that the auto industry is showing signs of revival and modest job growth is returning to the province, “I think the biggest turnaround will be in Ontario” in coming months.”

With most analysts forecasting that home building across Canada will maintain approximately the August level of activity in the coming months, and some anticipating a further upturn, it seems likely that this industry, which had been subtracting from growth, will strengthen it in the third quarter.

It will be a while, though, before home builders are cranking out more than 200,000 homes a year, as they did during the boom years that ended in 2008. Construction next year will remain pretty close to current levels, predicts economist Robert Kavcic at BMO Capital Markets.

And there is one potential cloud over the outlook for a healthier pace of home construction. Derek Holt, chief economist at Scotia Capital Markets, worries that builders are sitting on a rising number of unsold new homes, suggesting to him that they could be inclined to limit their construction in coming months.

That’s not a factor that worries other analysts very much, though. Their outlook is guided more by resales of existing homes, a market that accounts for about twice as many transactions as the market for new homes and that heavily influences new-home construction with a lag of a few months.

Resales have shot up at a stunning rate after cratering at the beginning of this year, with July registering a whopping 18% more transactions than a year earlier.

The surge of purchases, driven by low mortgage interest rates and improving consumer confidence, has diminished the supply of existing homes available to buyers in every province, said Gregory Klump, chief economist with the Canadian Real Estate Association.

As a result, the large resale market has shifted from having an excess of homes for sale to being in the early stage of developing a shortage. In large markets such as Toronto and Vancouver, there are once again reports of multiple offers on some homes, Mr. Klump said.

Since many buyers are willing to look at either new or resale homes, it’s not clear how the new-home market could suffer from a long-lasting oversupply under these conditions.