Nexen deal sheds light on China's oilsands strategy

Tue Aug 21, 2012 7:55pm EDT
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By Judy Hua and Charlie Zhu

BEIJING/HONG KONG (Reuters) - CNOOC's (0883.HK: Quote) 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.   Continued...