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Inside China’s Failed $15 Billion Canadian Oil Sands Investment

Oil Sands Mining

China’s ambitious entry into the Canadian oil-sands is not only turning out to be ill-timed, it is turning out to be grossly mismanaged, raising questions about the merit behind China’s $35 billion in investments in Canada’s energy sector between 2009 and 2013.

China National Offshore Oil Corporation (Cnooc), China’s third-largest national oil company, purchased Nexen, Canada’s ninth-largest oil company for $15.1 billion in 2012. The deal valued the assets of Nexen at $17 per barrel.

“They went in with their eyes wide open thinking there were things they could do to improve Nexen,” said Greg Stringham, an industry consultant who until recently was in charge of oil sands at the Canadian Association of Petroleum Producers, reports The Wall Street Journal.

However, with oil prices sliding to below $50 per barrel, Cnooc might have to take an impairment charge of more than $5 billion on Nexen, according to Nomura analysts, reports The New York Times.

“The deal has turned out to be a bit of a dud for them,” said Gordon Houlden, a China expert at the University of Alberta, reports The Wall Street Journal.

Two accidents; a pipeline burst at their Long Lake facility in Alberta that spilled 31,500 barrels of oil, and the death of two workers in an explosion at the Long Lake plant’s crude-processing unit, have led the Nexen Energy ULC Chief Executive Fang Zhi to admit shortcomings in the company’s ability to run the unit.

The Long Lake crude processing unit is important, as it converts the heavy crude drilled from nearby wells into premium light oil. The other oil producers in the area also depend on this facility to thin out their heavy crudes for long-distance shipment. Related: Oil Is Facing The Perfect Storm

Cnooc’s plans to increase production by drilling new wells near the Long lake facility have been hampered after the accidents.

The repairs at the Long Lake processing unit will cost $100 million, however, the company is unlikely to make a decision on restarting the unit before the fourth quarter of this year, and the unit will remain idle until then.

This will lead to a layoff of 350 employees, which is in addition to the 120 job cuts announced three months ago. The company had cut 300 jobs in its Calgary headquarters and 100 in the United States and the United Kingdom last year, which indicates the struggle by Cnooc to manage Nexen post-acquisition.

Nexen’s current output of 15,000 barrels a day is a far cry from the 50,000 barrels a day it produced last year, and well short of the 72,000 barrels a day of advertised capacity. However, the company plans to increase production to 27,000 barrels a day by next month.

The Nexen unit uses a heavy oil-waste product, which is likely to lead to higher greenhouse-gas taxes, as the unit releases large amounts of carbon dioxide into the atmosphere.

Nonetheless, Mr. Houlden believes that though in the short-term Nexen is facing a damage to their reputation and profitability, the management is in for the long-haul.

“I’m not saying it wasn’t a good buy; it just hasn’t been a great buy in the short term,” Mr. Houlden said. “All it will take is a bit of a price turnaround, a couple of years of clear running, and it may turn out to be an excellent medium-term buy,” reports the Calgary Herald.

However, until then, the overseas acquisitions by China to meet their ever increasing demand for crude oil seems to be a bit disappointing.

By Rakesh Upadhyay for Oilprice.com

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  • Rick Bodkin on July 18 2016 said:
    Why would you feature an image of an open pit mining oil sands operation when featuring a story on Nexen Long Lake??? Nexen is an insitu operation using SAGD technology. This only provides more misinformation to the vast majority of people who are uneducated about the environmental impacts due to oil sands development. It furthers the misconception that Canada's oil sands region is nothing but clear cutting of trees due to open pit mining; when in fact, open pit mining is used in less than 20% of Canadian oil sands operations, accounting for less than 3% of the total surface area of the oil sands region in Alberta.

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