By Judy Hua and Charlie Zhu
BEIJING/HONG KONG Aug 22 CNOOC's
planned $15 billion purchase of Canada's Nexen 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
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
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 , Sinopec Group --
parent of Asia's largest refiner Sinopec Corp
-- 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 and Talisman.
China's search for oil sands and technology started in 2005,
when CNOOC bought a minority stake in MEG Energy Corp
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
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 authorised to speak to foreign
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.