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Asian investors cast eyes on junior energy players

In late June, a small company exploring for natural gas in Yukon announced that it had found a new investor. A subsidiary of CNOOC Ltd., one of China's top state-owned energy firms, had agreed to help Northern Cross (Yukon) Ltd. bankroll drilling on its land in the Canadian territory, which has for decades gone almost completely unnoticed by the oil and gas establishment.

The size of the CNOOC investment was not disclosed. But it's clear that if Northern Cross finds the Yukon natural gas it's chasing, Chinese funds will have been critical.

It's equally clear that when it comes to Chinese investments, Fort McMurray is no longer the only attraction.

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On Sunday, another Chinese giant, Sinopec, announced it had agreed to take over Daylight Energy Ltd. for $2.2-billion. What both the Daylight and Northern Cross deals hold in common is that they show Chinese money pouring into energy resources that lie far outside of the oil sands. Those enormous crude 

reserves were the initial destination for much cross-Pacific oil and gas investment.

No longer. From the Arctic, to northeastern B.C.'s huge natural gas deposits to the riskier world of Calgary's small-capitalization oil explorers, Asian investors are demonstrating an ever-larger appetite for the breadth of 

Canada's energy wealth.

"Fifty per cent of the investable oil and gas reserve assets in the world are based in Canada," said Chris Lee of Deloitte Canada. Among Asian investors, "there is still a tremendous amount of interest in the oil sands. But they're going to the next stage in terms of trying to get more operational experience. … And you'll just continue to see more investments over and above what we're seeing in the oil sands, into all facets of the oil and gas industry."

Three of the top Chinese firms – Sinopec, CNOOC and Sinochem, which has yet to make a Canadian purchase – have publicly stated their intent to buy assets that are not confined to the oil sands. A series of technical and exploration advances have allowed non-oil sands assets, such as shale gas and oil lands owned by Daylight, to offer quicker returns and fewer environmental concerns.

Natural gas in particular brings several benefits. At current prices, it's cheap. And efforts to build LNG export terminals offer the potential of bringing Canadian energy resources across the Pacific. Those factors have drawn substantial spending into the rich shale gas fields of northeastern B.C. from companies like Mitsubishi Corp., Korea Gas Corp. and Petronas.

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At a time when Europe and U.S. are struggling, Asia's ascendant financial importance is also key – and that is beginning to extend beyond the major state-owned firms.

"There are private Asian investors who are very interested in supporting startups and supporting small-caps on the energy side," said Bill Andrew, the former chief executive officer of Penn West Exploration. Asia has become "the premier source of capital in the world," he said.

Today's rising flow of dollars portends a time when even junior oil and gas companies may add Shanghai and Beijing to investor road-trip itineraries that now focus largely on Toronto, New York and Chicago.

At the same time, the Asian presence in Calgary is set to grow.

After testing the Canadian energy waters for several years with smaller investments that included joint ventures and minority interest bids, Chinese and other firms are growing increasingly assertive. As the Daylight acquisition demonstrated, there is a will to move beyond being a disinterested investor and into full ownership.

As that happens, foreign firms will find their energy deals increasingly scrutinized by the Canadian government, which must approve any large acquisition of a controlling interest under the Investment Canada Act. Yet outside of a potential bid for a Canadian icon – Suncor Energy Inc., Canadian Natural Resources Ltd., or the like – even that scrutiny is unlikely to prove onerous, given the increasing comfort in both Calgary and Ottawa with Asian capital.

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"Certainly the government has been at pains, repeatedly, to say that it welcomes Chinese investment in Canada," said Omar Wakil, a Torys LLP lawyer who has represented companies working through the Investment Canada process.

And, he added, as the list of Asian acquisitions grows, "people are seeing that life goes on and these are things that we can live with. In fact, they bring a lot of benefits to the Canadian economy, particularly at a time of economic recession."

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About the Author
Asia Bureau Chief

Nathan VanderKlippe is the Asia correspondent for The Globe and Mail. He was previously a print and television correspondent in Western Canada based in Calgary, Vancouver and Yellowknife, where he covered the energy industry, aboriginal issues and Canada’s north.He is the recipient of a National Magazine Award and a Best in Business award from the Society of American Business Editors and Writers. More

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