Kuwait's state-owned petroleum company has signed a preliminary deal to invest as much as $4-billion in a joint venture with Athabasca Oil Corp. to develop some of its oil sands properties in northern Alberta.
Kuwait's Ambassador to Canada, Ali al-Sammak, confirmed in an interview that senior Kuwait Petroleum Corp. officials signed a memorandum of understanding earlier this month. A final agreement is expected in October.
"It's a plus-or-minus $4-billion deal and in October they'll be coming back to follow up what has been signed," Mr. al-Sammak said i n a telephone interview. "So we're doing very good – this proves that we're good close friends."
He said Kuwait Petroleum is seeking to diversify its operations beyond the Middle East and to improve its access to oil sand extraction technology, which could be used in its own heavy oil fields.
The proposed investment highlights the rising interest from state-controlled enterprises in the Middle East and Asia in capturing a piece of the oil sands boom – and the political challenge facing the Harper government in deciding how to deal with them. If the deal is completed, Kuwait Petroleum would join a growing list of state-owned oil companies targeting Canadian oil and natural gas assets. Two proposed takeovers are now before Investment Canada for review: CNOOC Ltd.'s $15-billion offer for Nexen Inc. and the $6-billion bid by Malaysia's Petronas for Progress Energy Resources Corp., which was approved by shareholders this week.
Half an hour before Friday's market opening, the Investment Industry Regulatory Organization of Canada announced that trading in Athabasca's stock was halted because of pending news.
Athabasca signalled last month in a conference call with financial analysts that it was in the final stages of negotiating a joint venture with an unidentified investor.
Industry sources say the recent deals could mark the beginning of a large wave of foreign investments and acquisitions in the Canadian energy sector. These sources said that state-owned or private companies from South Korea, Russia, China and emerging Asian nations are currently in discussions with a number of Calgary-based companies.
"It is very, very busy right now. There is a lot of intensity on the acquisition front," said Brock Gibson, Calgary-based chairman of Blake Cassels & Graydon LLP. Mr. Gibson declined to discuss specific transactions, but said his law firm has not seen so much deal activity since the mid-2000s. The increased interest puts pressure on the Harper government to clarify its stance on foreign investment in the energy sector.
The government is currently grappling with a host of issues raised by the CNOOC-Nexen deal that go beyond the benefits of the specific transaction, sources said Thursday. They include how much offshore presence they should encourage in key sectors such as the oil sands and B.C.'s booming gas fields.
Ottawa is also reviewing its policies toward state-owned acquirers, amid questions about whether companies from interventionist, emerging-market countries like China, Malaysia and Kuwait should be treated differently from Norway's Statoil, a government-owned but commercially-run company whose investments the government has welcomed.
Some critics within the Conservative Party – led by Immigration Minister Jason Kenney – are skeptical of Chinese companies' claims to be following market principles.
An Athabasca spokeswoman said there is "no news yet" about a potential joint venture and said the company's CEO was unavailable to comment.
It's unclear whether a deal between Kuwait and Athabasca would require federal approval; it would depend on how it is structured. Foreign acquirers are targeting Canada because of its huge oil and gas reserves and relatively open door to foreign investment. Low valuations in the energy sector are also burnishing the appeal of prospective investments.
Some of these potential acquirers are being actively courted by Calgary companies such as Athabasca because they lack the capital to finance expensive oil sands projects.
Athabasca has aggressively acquired oil properties since it was founded in 2006, but it does not have the financial heft to develop on its own the 1.6 million acres of property in the oil sands. It was able finance the development of its Dover and MacKay River properties only after it raised $1.9-billion in 2010 by selling a 60 per cent stake in each of these two properties to state-owned PetroChina International Investment Co.
The enormous cost of developing the vast oil sands is an industry-wide problem. Alberta's Energy Resources Conservation Board estimates the oil sands host 170 billion barrels of recoverable reserves, making them one of the largest crude deposits in the world. The Canadian Association of Petroleum Producers expects it will cost energy companies $23-billion in 2012 to produce oil from the tar sands. The cost of producing expected increases in oil sands output could add up to more than $100-billion by 2020.
"Canada is a small country with a relatively small capital market. There is no way Canada can finance the development of the oil sands," said John Brussa, a Calgary lawyer and chairman of Penn West Petroleum Ltd.
"We need foreign capital and foreign buyers."