PetroChina to Take Oil Sands Stake for $1.7 Billion

PetroChina, Asia's largest oil and gas company, is making a $1.7 billion investment in the Canadian oil sands.

Athabasca Oil Sands said Monday that PetroChina is buying a 60 percent working interest in its Mackay River and Dover oil sands projects in northeastern Alberta.

Bill Gallacher, chairman of privately held Athabasca, said it is hard to finance oil sands developments in the traditional equity markets. He said a joint venture with one of the world's largest oil companies will ensure the two projects are completed on time.

"Oil sands projects are very capital-intensive, long-term investments and difficult to fully finance in the traditional equity market," Gallacher said in a statement.

He said striking strategic joint venture arrangements with PetroChina "can ensure that the MacKay River and Dover projects will be developed in timely manner, which is excellent news for Alberta and the rest of Canada."

Athabasca President and CEO Sveinung Svarte said there is also a funding agreement in addition to the $1.7 billion but declined to immediately provide details beyond saying it is a very important part of the deal.

The projects are in the early stages and are estimated to contain 5 billion barrels of oil.

Alberta is home to vast reserves of oil sands. Industry officials estimate the region could yield as much as 175 billion barrels of oil, which would make Canada second only to Saudi Arabia in crude oil reserves.

However, the cost of getting the oil out of the sand is prohibitive. Analysts say oil needs to be at $80 a barrel for new oil sands projects to be viable. Oil futures have recently been trading near $70 a barrel, well below their July 2008 highs above $147 a barrel.

The global selloff of commodities last fall hurt Alberta's oil sands industry, but as the price of oil runs up again investors are looking to develop an industry that was previously plagued by the inflationary pressures of labor and steel in the once booming region. The oil sands sector cooled last fall as every major company scrapped or delayed some expansion plans.

The massive oil sands projects have also been criticized as a growing source of greenhouse gas emissions.

Athabasca Oil Sands calls itself one of the largest lease holders in the Athabasca region with net working interest in more than 1.3 million acres (500,000 hectares).

The deal with PetroChina is subject to regulatory approval in Canada as it has to pass a new national security test recently incorporated into Canadian law. Athabasca informed the federal government and the provincial Alberta government about the deal before announcing it.

"We don't really believe that should be a major obstacle to this deal," Svarte said. Canada's finance minister recently visited China.

Svarte said the expect the deal to close on or about Oct. 31.

The partners plan to extract bitumen from the oil-soaked sand using methods like steam-assisted gravity drainage, in which steam is pumped into the reservoir, making the oil thin enough to flow to the surface in a pipeline.

Athabasca has filed regulatory applications for approval of two pilot projects, and plans to seek approval for the first 35,000 barrel-per-day commercial phase of MacKay River by the end of this year.

Rumors of a deal pushed up shares in a few smaller oil sands companies, including UTS Energy and Connacher Oil and Gas . French oil giant Total failed in its bid to purchase UTS earlier this year.

PetroChina has been interested in building a pipeline from Alberta to British Columbia's Pacific coast that would have supplied crude oil to China from Canada's oil sands, but the project has not moved forward.

The proposed Gateway pipeline was designed to ship about 400,000 barrels per day of crude from Alberta's oil sands to Asian markets and California via a new marine terminal in Kitimat, British Columbia.

PetroChina's deal for a stake in the oil sands might raise concerns in Washington where the U.S. is eager to remain a chief market for the oil. President Barack Obama has said he would like to reduce America's reliance on Middle East oil. U.S. officials consider the oil sands a safe and secure supply but environmentalists have dubbed it dirty oil.

China's state-owned oil companies have invested billions of dollars in exploration or production ventures in Africa, Latin America and elsewhere. China is the world's second-biggest oil consumer.

PetroChina is Asia's biggest oil producer by volume and the world's most valuable company by market capitalization after Exxon Mobil .

Geopolitics Central economist Vince Lauerman said it's smart for Canada to sell oil sands bitumen to markets other than the U.S., where the "dirty oil" moniker has gained traction and where emissions regulations are expected to become more stringent.

Lauerman also said there are only so many sources for such large capital investment needs.

"Obviously there's some cash-strapped companies in northern Alberta that need outside financing and it's tough to find it in more traditional areas, so the Chinese with their big wad of cash in their back pocket are coming hunting," Lauerman said.

"The Chinese want to diversify their sources of supply for energy security reasons and Canada has huge resources that they would like to gain greater access to," he said.

PetroChina is not the first Chinese firm to show interest in Canada's vast oil reserves. Sinopec has a 50 percent stake in the Northern Lights project 60 miles (100 kms) northeast of Fort McMurray Alberta., with Total holding the rest.