A wave of high-priced acquisitions in the Alberta oil sands by Asian state oil companies and wealth funds is making it increasingly tough for Canadian investors to compete.

Chinese, South Korean, and now Thai investors have mounted an investment rush in northern Alberta. Backed by their governments' desire to secure long-term oil supplies for booming economies, they have had the financial muscle to pay top dollar for a piece of the largest oil resource outside the Middle East.

Most acquisitions have been stakes in largely undeveloped projects, and analysts and bankers say the buyers have shown the patience to sit tight and learn the business where many of the locals would be clamoring for cash flow.

"The Asian sovereign entities have a capital cost advantage," Canaccord Genuity analyst Phil Skolnick said. "Any asset up for sale that's of interest to those sorts of entities, it's going to be very tough to compete with them."

A Canadian or U.S. player typically shoots for a 10 percent return or more to make up for cost of capital, and prices for recent deals make that kind of return impossible in the short to medium term, Skolnick said.

The shopping spree picked last week, when Thailand's  PTT Exploration and Production said it will buy 40 percent of Statoil's early-stage Kai Kos Dehseh project for $2.3 billion.

That is $300 million more than Statoil paid for the entire asset just three years ago, and on a per-barrel basis is the priciest deal yet for an early-stage development.

The year's richest asset buy was Sinopec Corp's $4.65 billion acquisition of ConocoPhillips' 9.03 percent stake in the Syncrude joint venture.

Asian appetite has increased over the past five years and is expected to accelerate again because the oil sands are seen as one of a few energy investment opportunities in the world that offer large resources and stable politics.

"These aren't going to be the last. We are aware of other discussions going on along these similar lines," said Michael Gosselin, managing director and senior banker at BNP Paribas' Canadian division.

"Looking 20 years down the road, I think Canada is going to end up supplying a lot of Asia-Pacific's energy needs versus the primary market being the U.S. We're going to see that pendulum swing a bit more."


Besides low capital costs, Asian investors require a host of other factors to make a deal successful, including local knowledge, technical expertise in a complex industry and marketing networks for the eventual production, Gosselin said.

That is why many of the buyers have been willing to pay a premium for stakes in projects run by local developers.

"The Canadian companies that are doing this, they're not giving away the store. They're giving away 30 percent of the economics for 50 percent of the cost," he said.


The PTTEP acquisition is worth about C$1.46 per barrel of undeveloped resource, setting a new high for such deals, according to FirstEnergy Capital Corp analyst Michael Dunn.

That compares with C$1.13 a barrel in MEG Energy Corp's initial public offering this year and 63 Canadian cents a barrel for PetroChina's 2009 acquisition of 60 percent of two leases owned by Athabasca Oil Sands Corp.

Dunn's research shows undeveloped leases earmarked for steam-driven drilling projects fetch the least and well-established mining and upgrading ventures attract the highest bids, as was the case with Sinopec's purchase of the Syncrude stake, at C$5.17 a barrel.


Besides having a financial advantage, Asian investors have largely been immune to the environmental controversy surrounding the oil sands, said Joseph Doucet, professor of energy policy at the University of Alberta.

Green groups are intensifying campaigns to warn investors about the impact of oil sands development on land, water, air, and local communities, and this year Statoil and BP Plc faced revolts from some shareholders over their investments.

"The operators of these (Asian) oil companies and the politicians involved have thicker skin, there is less of a process for public discourse or public protest from the Chinese public," Doucet said.

The buying binge has raised questions about Ottawa's tolerance for growing foreign control over oil sands resources, especially after Prime Minister Stephen Harper's government essentially blocked Australian mining company BHP Billiton's $39 billion bid for Potash Corp last month.

Potash, the agricultural nutrient mined by the company, was deemed a "strategic resource" and Potash Corp is a major world supplier.

The large number of players in the oil sands, many of which being well-established Canadian companies and international oil majors, has kept protectionist fervor at bay so far, analysts said, as has the vast acreage with development potential.

"(The government doesn't) seem to have an issue with them buying assets, and that's the approach these Asian sovereign entities are taking," Skolnick said. "They don't have a need to actually go buy a company, because I don't think they want to operate a project. They just want a sizable piece of it to be their hedge for their need for energy consumption.

"There's definitely been a green light to foreign entities to go in and buy these assets and do joint ventures."

Source: Reuters

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