Tar Sands Production in Alberta (photo from flickr by: mrjorgen)

This week, the China National Offshore Oil Cooperation (CNOOC) made a big move into Canadian tar sands. CNOOC, a state-owned oil company, announced China’s largest foreign acquisition ever with a $15.1 billion purchase of Nexen Inc., a Canadian-based energy company. Already approved by the boards of both companies, the deal goes to the Canadian government for approval. The final go-ahead is expected.

The deal gives China greater access to Canada’s tar sands, vast deposits of bitumen intermixed with sand and clay. Canada’s proven reserves of oil, 97% of which are of the unconventional variety like tar sands, are estimated to be the third largest in the world (after Saudi Arabia and Venezuela) at 173 billion barrels. Canada produces about 1.5 million barrels of oil per day (bpd) from tar sands, and that number is expected to double over the next few decades.

The deal may be China’s largest foreign acquisition ever, but it is only the latest in a series of investments made in energy markets around the world. Needing to feed its rapidly expanding economy (albeit at a decelerating rate), China has spent years scrambling to acquire oil assets around the globe.

At 59,000 barrels per day of production in Canada, Nexen certainly is not the biggest tar sands producer. That title belongs to Suncor Energy, which produced about 305,000 barrels per day from tar sands. But, by acquiring a tar sands producer, it can gain a foothold in an oil-rich country, and gain access to new technology, a key priority for Chinese policymakers. When looking at China’s insatiable growth in energy demand, one begins to see why that is important.

Once self-sufficient in oil, Chinese oil consumption surpassed production in the mid 1990’s, and never looked back (see graph). For 2011, China consumed 9.7 million bpd and only produced 4.3 million bpd, requiring 5.5 million bpd in imports. Demand has expanded to feed China’s car market, which surpassed the U.S.to become the biggest in the world. Last year, Chinese consumers purchased 18.5 million cars.

From an energy security perspective, China has also wanted to diversify its sources of imports. Currently, about 80% of its oil passes through the Straits of Malacca, a 900-mile long passage way that constricts to about 1.2 miles at its narrowest point. For China, this chokepoint represents a strategic threat, as a disruption would cripple supply.  Moreover, China remains dependent on the Middle East for roughly 50% of its oil imports. Regional volatility has given the Chinese regime the impetus to look elsewhere for other sources.

To diversity its supply, China pursued a “going out” strategy, in which through its state-owned enterprises, it would use surplus capital to make investments abroad. Often, the terms of the deals are extremely generous, making it difficult for international oil companies to compete with. China has acquired assets in Russia, Kazakhstan, Venezuela, Brazil, Ecuador, Bolivia, Angola, and Ghana, to name a few. This allowed it to acquire critical assets, and in the meantime, improve access to technology and management expertise.

The deal with Nexen shows lessons learned by the Chinese government in the wake of a failed bid for a U.S. oil company. In 2005, China tried to pull off a hostile takeover of Unocal, but was forced to scrap the deal after a popular uprising in the halls of the U.S. Congress. It has also learned lessons from BHP Billiton’s, an Australian mining giant, attempted hostile takeover of a Canadian fertilizer company, which was rejected by the Canadian Parliament. Heeding these lessons, CNOOC went after Nexen – this time with the full support of Nexen’s board.

China needs all the energy it can get at the moment, and it is investing in a wide variety of sources. CNOOC’s acquisition gives it an opening into Canada’s rapidly expanding tar sands industry.

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