China's number 3 oil company, CNOOC Ltd. has announced that it had struck an agreement with MEG Energy Corp. to acquire a 16.69% in the Canada-based firm. The acquisition, for which CNOOC paid as much as C$150 million, was made through the company's wholly owned subsidiary CNOOC Belgium BVBA. The company has a whopping cash flow of about C$2.2 billion to date.
MEG is a private energy company engaged in the oil sand business and owning 100% working interest in oil sand leases of 52 contiguous sections (32,900 acres) in Alberta. The region is estimated to have a bitumen reserve of over 4 billion barrels, with 2 billion barrels recoverable.
It was much hyped last year that China Petroleum & Chemical Corporation would buy into Husky Energy Inc affiliated to Hong Kong's Hutchison Whampoa with an investment of Hong Kong $70 billion. Husky Energy possesses the biggest oil sand mine in Alberta, with the total reserves being over 1 billion barrels.
In terms of this, the outlay paid by CNOOC for the deal is rather low. "I am delighted that CNOOC is able to obtain the oil sand project with such a low price. The recent advances in technologies result in the decline of working costs and the increase of recoverable rate, which make many similar projects viable economically," said Yang Hua, vice president of the company. The oil sand reserves in Alberta are about 1.6 trillion barrels, and over 300 billion are recoverable with the current technologies.
The global investment bank, Goldman Sachs noted that the acquisition would do little help to increasing CNOOC's output by 2008. Managers of the company consider the deal a long-term strategic investment with low risks. Goldman Sachs maintained CNOOC's rating at "Market Perform".
The development cost of oil sands is between US$1.62 to US$2.43 per barrel and the cash operating cost is from US$4 to US$7.3 per barrel. The acquisition is in line with the 15% internal return rate that CNOOC requires.
The international oil price has rocketed from US$10 per barrel to US$53 per barrel since 1998. This makes energy companies extremely interested in the exploitation of oil sands.
Oil sands, the blending of water, earth, and sands, are different from normal crude oil in productions. Crude oil can be extracted directly, but in the production of oil sands, workers have to separate bitumen with extraction techniques first, and then abstract heavy oil from it.
The complicated techniques make the extraction of oil sands too expensive. The cost of separating oil from oil sands is roughly US$25 per barrel, according to statistics. Therefore, the construction of a large oil sand extracting plant needs investments of multi-billion dollars. Once the plant starts production, it cannot be stopped suddenly.
However, because of the high oil price, some countries have begun to consider exploiting oil sands. The reserves of oil sands are rather rich in Canada and Venezuela, which are about 3.5 trillion barrels. Calculated by the consumption volume of 30 billion barrels every year, the reserves are enough for the world to use over 100 years. As a matter of fact, the crude oil output in Alberta exceeds 30 million tons now. But the Canadian government still plans to invest C$60 billion to develop oil sands by 2050.
Oil sands are widely distributed in over 20 provinces in China, however, because of the high development costs and complicated exploitation techniques, the country has not commenced the exploitation of oil sands yet.