SHENZHEN (ResourceInvestor.com) -- State-owned Sinopec, China's largest petrochemical company, is targeting Canada's Husky [HSE.TO] to build out the firm's energy portfolio and secure long-term feedstock.
Sinopec is less interested in Husky's downstream outlets than its upstream potential in Western Canada, offshore Eastern Canada, Indonesia, and in the South China Sea.
Hong Kong tycoon Li Ka-shing owns 36% of Husky privately, and a further 34.7% via his holding company, Hutchison Whampoa. Sinopec intends to buy Li's shares to accomplish the acquisition.
Particularly attractive to Sinopec is the prospect of eventually exploiting the likes of Husky's Tucker oil sands project, northwest of Cold Lake, Alberta and the White Rose oil field in Newfoundland.
"The reserve is accounted in billion barrels and it can't be exhausted after 50 years' production," Li Ka-shing said. Vast reserves of mostly untapped oil sands are drawing attention for Chinese companies who need to secure reliable energy supplies as the country grows at breakneck pace.
Canada is chock full of oil sands resource especially in Alberta where Husky headquartered. However, the recovery rate for oil sands is poor and exploitation cost are extremely high ensuring that deposits will only be brought to account with sustained high oil prices.
"The price of oil sands production is $15-16 per barrel with a total cost of $20-25. Sinopec will lose if the oil price can't keep $30 to $35 in the long term and production has to be sustained," said Liu Tao, general manager of Shanghai Yuanfu Management Consultancy.
Compared with a production cost of about $3 a barrel in the Middle East and less than $10 within China, Canadian oil sands certainly are expensive. However, a soaring oil price and widespread conviction that prices have rebased to permanent new highs has excited renewed interest.
As a result Husky's share price has been on the move and Sinopec faces a bill of more than HK$70.6 billion to buy Li and Hutchison Whampoa's controlling interest in Husky.
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The collapse of the MinMetals-Noranda deal offers no parallel in this case since Husky is already foreign controlled and, therefore, less prone to the sort of political meddling that was seen over Noranda.
Sinopec's deal is backed by China's State Assets Supervision and Administration Commission of the State Council (SASAC). The director of SASAC said in news conference late last month that the state encourages domestic enterprises to pursue offshore assets. That is part of a national plan to diversify sources and feedstocks.
It is also a favorable moment for Hutchison Whampoa to sell Husky. It badly needs to cash to ameliorate the loss the HK $8.6 billion loss arising from its 3G telephony investments.