Another Chinese Investment in Canada's Oil Sands (PWE, PTR, ENB, CEO, SNP, TOT, COP, KMP)

Penn West Energy Trust (NYSE:PWE) is the latest beneficiary of Chinese interest in the Canadian oil sands. China Investment Corp., a state-owned sovereign wealth fund, has agreed to invest about $1.23 billion in developing Penn West’s 237,000 net acres in the Peace River area of northern Alberta.

The two entities will form a joint venture to which Penn West will contribute assets worth about CDN$1.8 billion in exchange for a 55% stake, and CIC will contribute $CDN817 million for the remaining 45% stake. CIC will also buy 23.5 million of Penn West common units for about CDN$435 million. Penn West will operate the Peace River project through a wholly owned subsidiary.

This deal is just the latest in a string going back five years in which Chinese firms have purchased projects in the Canadian oil sands. In the first deal, in April 2005, Petrochina Company Ltd. (NYSE:PTR) agreed to buy into a pipeline proposed by Enbridge Inc. (NYSE:ENB) to transport oil from Alberta to the west coast of Canada. PetroChina later pulled because of regulatory delays.

In the same month, Cnooc Ltd. (NYSE:CEO) paid CDN$122 million for a one-sixth share in privately held MEG Energy. A year ago Sinopec, officially China Petroleum & Chemical Corp. (NYSE:SNP), upped its stake in the Northern Lights project owned by Total SA (NYSE:TOT). That CDN$10.7 project has since been put on hold.

In August 2009, PetroChina agreed to buy 60% of two undeveloped projects for CDN$1.9 billion. Last month, the biggest deal so far was announced when Sinopec agreed to buy the 9.03% stake in the Syncrude joint venture owned by ConocoPhillips Corp. (NYSE:COP) for $4.65 billion.

What makes today’s oil sands deal different is that the investment is coming from a sovereign wealth fund, not an oil company. CIC has also invested in energy projects in Russia, Kazakhstan, and Indonesia.

Canada is not the only recipient of Chinese investment largesse. Iraq, Nigeria, Angola, Sudan, and more than two dozen other countries have received investments either from Chinese oil companies, banks, or sovereign wealth funds.

Chinese investment in most of these projects is followed by additional later investment in the capital expenditures needed to develop the projects. That’s certainly true in the case of Penn West, which plans to use the funds to “strategically advance the development of its significant ownership of light-oil resources.”

Penn West has held its Peace River acreage for some time, but has been unable to fund development on its own. The company did not even have a schedule in place for developing its oil sands assets.

China’s reported investment today in Nigeria follows the same pattern. Nigeria cannot afford to build refineries to produce enough refined products for its population. A group of Chinese banks today have preliminarily agreed to build three refineries in the country at a cost of about $23 billion. Because the gasoline would be for domestic Nigerian consumption, China itself gains only whatever profit it makes from the refineries over a long time.

However, China does gain a nice boost in goodwill from a country that owns vast, high-quality reserves of oil. The low-margin refining business has not attracted any investment, until today. When Nigeria next offers leases on offshore fields, China can expect more serious consideration, perhaps, than it might otherwise get.

All in all, having China spend its dollars and foreign exchange credits on developing oil reserves is a better use of the funds than more investment in the bubbly Shanghai and Beijing real estate markets. Every barrel that China develops helps offset its large and fast-growing demand for crude.

Paul Ausick