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BEIJING/HONG KONG (Reuters) - CNOOC's (0883.HK) planned $15 billion purchase of Canada's Nexen NXY.TO will make the Chinese state energy giant the operator of a major oil sands project for the first time, giving Beijing the expertise to be able to tap massive unconventional oil reserves at home.
China estimates the oil-soaked sands it sits on could hold as much as 14.5 billion barrels, which would be double the country's proven oil reserves. It also estimates it has huge reserves of heavy oil and shale oil -- oil trapped in shale formations.
But the world's second-largest oil consumer has pumped little from domestic sands and shale so far as Beijing focuses on Canada's oil sands industry -- the world's third-largest oil deposit -- and cleaner unconventional gas resources at home.
China will eventually need the oil at home to fuel its expanding economy and keep expensive imports in check, and the purchase of Nexen, which would be China's largest overseas acquisition if it wins Canadian and U.S. regulatory approval, would give it new technology and operational experience to help extract its domestic oil.
"The Chinese companies must learn both ends, technology and its operational application," said Al Troner, president of Houston-based Asia Pacific Energy Consulting. "It is definitely not something that Joe Shmoe comes into and can do efficiently on their own."
"Key benefits (of buying Nexen) include gaining operatorship of key oil sands assets" and improving the economics of projects with an oil sands producing technology known as Steam Assisted Gravity Drainage (SAGD), CNOOC said in a presentation to investors on July 23 after announcing its bid for Nexen.
Among Nexen's international portfolios that CNOOC would take over is the operation of Nexen's Long Lake project in Alberta, Canada, a major project in the Athabasca oil sands region, and its oil sands technology.
But the technology is costly. On Tuesday, CNOOC's shares slid 3 percent after it announced that first-half net profit fell by almost a fifth and as it cut its dividend by 40 percent to set aside capital for the Nexen acquisition.
Nexen is a 65 percent owner and operator of the geologically complicated Long Lake project, expected to have a production capacity of 72,000 barrels of bitumen per day and upgrading capacity of 58,500 barrels per day.
Tar-like bitumen needs to be upgraded into synthetic oil for use in refineries in order to produce gasoline or diesel.
Long Lake is also the first Canadian bitumen project to combine SAGD with an upgrading technology called OrCrude that can help producers consume less natural gas in the process of generating steam used to pump bitumen to the surface. The process of SAGD, widely used in Canada, involves injecting steam into the earth to loosen up bitumen so it can be pumped to the surface.
Nexen has the exclusive right to use the OrCrude technology with Canadian oil sands company OPTI -- bought by CNOOC for $2.1 billion last year -- within certain parts of Long Lake, Nexen said in its 2011 annual report. Nexen also has the right to use it elsewhere in Canada and most of the rest of the world, subject to certain rights for OPTI to participate, Nexen said.
"The real oil sands technology is about how you cut production costs and improve production efficiency -- this is the core part of the technology China needs as oil sands production is energy intensive and costly," said an official with a major state-run Chinese oil company.
CNOOC, China's third-largest oil company, has been pioneering China's push into Canada's oil sands industry, focusing on buying entire oil sands companies. Its purchase of Nexen would make it an operator of a major oil sands project for the first time.
CNOOC, PetroChina (0857.HK)(601857.SS), Sinopec Group -- parent of Asia's largest refiner Sinopec Corp (0386.HK)(600028.SS) -- and other Chinese firms have poured over $18 billion into Canadian oil sands properties, mostly buying minority stakes in projects operated by other companies.
Industry sources told Reuters that Chinese oil firms have been pondering the takeover of more Toronto-listed oil companies with oil sands assets to secure reserves as well as operating experience. Possible targets touted by investment bankers have included Canadian Oil Sands Ltd COS.TO and Talisman TLM.TO.
China's search for oil sands and technology started in 2005, when CNOOC bought a minority stake in MEG Energy Corp (MEG.TO) in what was China's first oil sands investment in Canada.
Fu Chengyu, then chairman and CEO of CNOOC, said in 2005 that the MEG deal was aimed at securing skills that "may help facilitate the exploitation of oil sands and shale in China, where large reserves of oil sands and shale were found in recent years."
China's Ministry of Land and Resources (MLR) concluded a nationwide oil and gas resources assessment in 2006, putting the country's recoverable oil sands reserves at 2.3 billion tonnes (14.5 billion barrels). That would double China's current proven oil reserves if all could be recovered commercially.
A total of 1.6 billion barrels had been found in four natural bitumen accumulations in Junggar Basin in the northwestern region of Xinjiang as of the end of 2008, according to the U.S. Geological Survey.
It also says China has 8.9 billion barrels of extra-heavy oil resource and substantial amounts of shale oil.
China will speed up development of its abundant shale oil resources and is considering launching some pilot projects, Liu Tienan, head of China's National Energy Administration, told state media earlier this month.
Liu added that China has recoverable shale oil resources of 10 billion tonnes.
Beijing has not set any domestic output goal for oil sands, heavy oil or shale oil in any of its five-year economic development plans even though it has set targets for shale gas and other cleaner unconventional resources in its 12th five-year plan for 2011-2015.
"Because of technology and cost constraints, China cannot develop all kinds of unconventional resources at home in one go," said an energy researcher with China's powerful economic planner, the National Development and Reform Commission. He requested anonymity as he was not authorized to speak to foreign media.
Despite the lack of a national target, an MLR research arm expects China to produce 500,000 tonnes of oil sands in 2015 (8,630 bpd), one million tonnes a year in 2020, and five million tonnes in 2030.
State oil firms now lack the incentives to make a headlong rush into domestic oil sands when more abundant and commercially viable bitumen reserves are available in Canada, analysts say.
The only oil sands project in China that has made some progress is PetroChina's Karamay project in the Junggar Basin. It is expected to produce oil in October and have an annual capacity of 100,000-200,000 tonnes by the end of 2012 and one million tonnes by the end of next year, Chinese media say.
Karamay started oil sands development on a trial basis around 2008, but it was suspended later as PetroChina balked at the high cost and lack of economies of scale, a MLR source said.
"Now our country is paying attention to unconventional resources, so PetroChina resumed its oil sands experiment in Karamay. It needs to find the right technology for the project," he told Reuters.
Editing by Simon Webb and Ken Wills