Warburg Pincus sees oil sands opportunity

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Warburg Pincus LLC, one of the world's oldest and largest private equity firms, wants to do more deals in Canada's oil sands.

In a rare interview, Charles (Chip) Kaye, co-president of the New York-based firm, said he thinks the U.S. government's decision to postpone approval of TransCanada Corp.'s Keystone XL pipeline was shortsighted. And it will in no way diminish Warburg Pincus's appetite for oil sands investments.

In fact, the firm is seeing more opportunities than ever in Alberta and British Columbia. "We've been quite active, and our pace of activity is increasing," Mr. Kaye said.

Warburg Pincus, which has more than $30-billion (U.S.) in private-equity assets under management globally, has invested roughly $1-billion in the oil sands to date. That includes investments in companies such as Black Swan Energy Ltd., Canbriam Energy Inc., Osum Oil Sands Corp. and MEG Energy Corp.Institutional investors have also backed startup oil sands companies.

Mr. Kaye indicated he was disappointed by the Obama administration's delayed decision on Keystone XL. "The decision that came out of the U.S. was a shortsighted one, dealing more with current politics," he said. "Ultimately, I think it will get built."

But he said the delay could create an opportunity for Canada to broaden its energy markets. "Canada has always run an energy industry that was essentially dependent upon the U.S. for access," he noted.

Alberta and Ottawa lobbied hard for Keystone XL; with that project stalled, both the provincial and federal governments argue this strengthens the need for Canada to build a westward pipeline to ship its crude oil to Asian markets. They are promoting Enbridge Inc.'s proposed Northern Gateway pipeline, which would transport crude from the oil sands to the B.C. coast. Regulatory hearings for the controversial project are set to begin in January. Meanwhile, Kinder Morgan Inc.'s existing Trans Mountain pipeline, which already reaches the Pacific, could be expanded to carry more crude.

"Beyond the access issue itself, there's also a question as to whether this creates the base upon which Canada can have a more significant role in the energy infrastructure and downstream businesses that create economic development, employment and all kinds of other things," Mr. Kaye said.

"Those questions are really for Canada to decide," he added, "but it's clear that it has the opportunity to create that infrastructure off its own West Coast to fill the demand that … is largely flowing to Asia."

As it scours the globe for investment opportunities, Warburg Pincus is increasingly shifting its focus to Asia. Mr. Kaye helped to launch the firm's Asian operations in the 1990s, and is a big believer in China's growth, at the forefront of emerging markets.

"For all the issues and challenges [emerging markets]have, that … 'rise of the rest' is a very powerful force that's going to define this generation," he said. "I think we will look back at the crisis of 2008-2009 as the inflection point where that trend became clearer."

That doesn't mean he is pessimistic about prospects for the U.S. economy. "I do think that there's this excessive pessimism that people are engrossed in," he said. "It ranges from double dips in economic decline in the U.S., to the destruction of the euro, to the implosion of China. The reality is that, at a business level, what we're seeing is a version of a modest, weakish recovery. But nonetheless a recovery."