China's CNOOC buying Canadian oilsands producer

The troubled Long Lake oilsands project has found new backing in a Chinese suitor that has agreed to purchase its partial owner Opti Canada Inc.  for $2.1 billion US.

CNOOC Ltd., China's largest offshore crude and natural gas producer, announced early Wednesday that it has offered to buy the struggling Calgary-based oilsands producer. Opti owns 35 per cent of Long Lake, while Nexen Inc. owns the rest.

Opti filed for a court-supervised restructuring designed to transfer ownership of the oilsands developer to creditors last week.

The TSX halted its stock as it conducts a delisting review after the company lost more than 90 per cent of it value over the past year.

A major reason for Opti's financial difficulty is the delay in getting Long Lakes bitumen production, which uses an upgrader technique developed by Opti, to targeted levels. The delay increased the partners' costs and lowered revenue.

Chinese like the oilsands

But Chinese companies with deep pockets have been making major thrusts into Canada's oilsands, scooping up other resource companies, as they seek out new sources of energy and material to support the quickly growing Chinese economy.

Under terms of the agreement, CNOOC Ltd. (China National Offshore Oil Corp.) will pay $1.18 billion to lenders who hold Opti's second lien notes and assume $825-million of first lien notes.

The Chinese company will also pay $37.5 million to backstop parties and $34 million to shareholders.

Just last week — after Opti filed for bankruptcy protection — it said bitumen production at the Long Lake will fall short of its 2011 output target due to lower-than-expected production so far this year.

At Long Lake, the companies pump steam deep underground to soften the peanut butter-thick bitumen so it can flow to the surface. The project is unique in that uses the dregs of each barrel of crude as a fuel source.

They have had trouble ramping up production from the steam-driven project due to a number of operational issues. The glitches have prevented Long Lake from reaching is target production rate of 72,000 barrels per day. In the most recent quarter, it produced about 27,900 barrels.

Opti looking for a deal

Opti has been undergoing a strategic review for well over a year, in hopes that a corporate or asset sale would help it address its debt troubles.

The Opti board of directors has voted unanimously in favour of the transaction with CNOOC, saying it is in the best interest of the company.

"CNOOC Ltd. is a technically experienced and well-capitalized company that is equipped to support further development at Long Lake and future expansions in the Canadian oil sands," said Opti president and CEO Chris Slubicki in a statement.

Yang Hua, the CEO of CNOOC, said the transaction strengthens his company's Canadian presence in the oilsands business.    "We believe that upside potential of the assets will facilitate local energy supply and our production growth in the long term."

The sale is expected to close in the fourth quarter of 2011, pending regulatory approvals in Canada and China.

Billions of oilsands assets sold

The deal is the latest in a string of Asian energy firms investing in the oilsands. In November, PTT Exploration and Production, Thailand's sole oil and gas company, bought a 40 per cent stake in Norway-based Statoil's largely undeveloped holdings in northern Alberta for US$2.28 billion.

In April 2010, China's Sinopec spent $4.65 billion US for a stake in the Syncrude Canada Ltd. partnership, which owns the world's largest oilsands mining operation north of Fort McMurray, Alta. Sinopec had already grabbed a foothold in the oilsands through its 50 per cent stake in Total E&P Canada's Northern Lights project.

In May of that year, China Investment Corp., a state-run sovereign wealth fund, said it would kick in $1.25 billion to help Penn West Energy Trust develop some of its oilsands leases.

And in 2009, PetroChina, a major Chinese oil and gas company that wants a stake in Canada's expanding oilsands sector, bought a 60 per cent stake in two oilsands projects from Athabasca Oil Sands Corp.