News Analysis: Chinese investors told to hold horses as Canadian oil patch loses ground

As the energy industry in Canada is struggling to control the oil prices, experts and business insiders suggest emerging opportunities for investment, but they warn Chinese investors to hold their horses.

Canada's big oil and gas companies start reporting their quarterly financial results this week, which sources in Alberta say could trigger more budget cuts and possibly another wave of layoffs even as crude prices edge up from multi-year lows since last summer.

"The volatility is hard to read as to where the bottom is," said Bruce Edgelow, vice president of energy with ATB Financial. " People want to have a sense where the market is going, we hate getting caught by surprise."

Major oil producers like Nexen ended up with asset writedown and job cuts, two years after China's CNOOC finalized the 15.1 billion U.S. dollar purchase, the country's largest overseas deal at that time. But Edgelow says the rate of returns in a downward market should not hamper the long term strategy for Chinese investment in the Canadian oil sands.

"Chinese investors are no different than we are as long term investors. While the near term price may affect the current view or appetite to do more, but we are investing for a long term," Edgelow told Xinhua in Calgary in a recent interview.

After CNOOC acquired a bloated workforce from Nexen, insiders say the integration of the two companies has not gone well.

The reason why CNOOC spent so much money on takeover, not on the property, but more on the team, is "When the established team becomes a burden, why not build a new team for that matter?" said Mason Wei, president of SinoSky Petroleum. "

Investment experts believe it takes time to consolidate after company mergers in terms of employees, structure and company culture. "It takes up to 10 years to judge an investment. When oil prices are to rise, the Chinese projects here in Alberta are to pay off," explained Derek Zhao at ATB Financial.

Canada's oil sands, mostly in the western province of Alberta, has proven reserves of about 170 billion barrels, the third largest in the world, after Saudi Arabia and Venezuela. Known as Capital of Energy, Calgary hosts the head office of nearly every major oil companies home and abroad. In the past 15 years, it has seen a booming capital inflow from all over the world, including Chinese state-owned CNOOC, CNPC and Sinopec.

As of January 2015, China has had a total investment of 53 billion U.S. dollars in Canada, 78 percent being in its energy sector, according to statistics from China Institute at the University of Alberta in Edmonton, which launched an online China- Canada Investment Tracker in November 2014 as part of their project to study Chinese investments in Canada.

Industry sources say China's capital and Canada's resource are a perfect match. In a move to seek more investment for the province that faces a cash crunch of up to 7 billion Canadian dollars, Alberta Premier Jim Prentice is set to visit China later in May.

Some state-of-the-art technologies developed by Chinese companies could help ease the criticism against the "dirty oil" by environmental groups. But analysts caution against the risks in tapping the high-cost tar sands, which involves environment concerns, policy restriction, pipeline layout and local labor system.

Immediately after the CNOOC-Nexen deal, Canadian Prime Minister Stephen Harper announced a consequential decision: there would be new rules preventing any more state-owned enterprises (SOE) from purchasing controlling interests in the oil sands.

"If it's for the government to review and decide the proposals, they must have the criteria to define what is state-owned and what is not, but they never made it public," said Jia Wang, deputy director of the China Institute. "The restriction is only on oil sands, not on other industries yet."

On the pipeline front, U.S. President Barack Obama has vetoed the Keystone XL Pipeline proposal carrying Alberta oil south to the American heartland, while the lingering Enbridge Northern Gateway Pipelines has been criticized by native groups citing concerns over oil sands expansion, which if completed would link Alberta with the west coastal marine terminal in Kitimat for transportation to the Asian markets by oil tankers. Sources say the United States is reluctant to see a closer energy connection between Canada and China.

For the moment, Chinese companies along with some global players such as Total, Statoil and Devon Energy are trapped in the bitumen mud, and sources reveal that some are planning for a retreat. When the companies rush for quick acquisition, they might overlook some of the risks, said Yongzhu Zhang, a senior engineer at Petro-Canada.

"It's advisory for Chinese companies going global to find a local strategic partner to set up a joint venture, instead of full takeover," said Zhang. "On one hand, the returns may have to split, but on the other, a lot of troubles can be saved because the local partner knows better dealing with stakeholders and governments."

Bracing for an emerging reshuffle scenario, investment experts caution Chinese investors to wait and see. "It can wait, but investors may want to bring a development plan for at least three years," said Yinghua Li, a senior investor between China and Canada. "They may have to prepare for a gloomy market for as low as 50 U.S. dollars a barrel, and they can also have multiple options when oil prices rebound to 100."

"So I encourage investors to look at the longer term investment, and notwithstanding the lows. If we can ride through these pieces, and actually maybe even put some dollars to work in lower price environment, you may find coming out of the market places actually stronger as opposed to weaker," said Edgelow. Endite