Experts say despite past irrational overseas investments, spending may well continue as good deals are still possible
The year-end retreat by China Investment Corp, the country's sovereign wealth fund, from Canada's mining and oil-and-gas sectors, has raised concerns that past overseas investments of State-backed oil companies may prove duds, due to the prolonged slump in crude oil prices.
After a string of bad investments overseas, CIC shifted its only office outside China from Toronto to New York at the end of 2015. The Toronto office used to manage CIC's investments in the energy sector. Since 2010, CIC invested about $1.9 billion in Canada's oil sands sector. Five years on, those investments are believed to have slipped into sharp losses.
China's State-backed oil giants, including China National Offshore Oil Corporation, the country's largest offshore oil and gas producer, and Sinopec Group, Asia's largest oil refiner, too, have a large presence in Canada. But, they are reportedly either scaling back their operations or putting new investments on hold.
Brion Energy, the Canadian unit of State-backed China National Petroleum Corp, also known as PetroChina, bought two oil sands projects in the MacKay River site and the Dover project for about $2.4 billion from Athabasca Oil Corp, a Canadian oil sands company.
PetroChina needed to make an additional investment of about $1 billion as a result of an 18-month delay in the first phase of the MacKay River oil sands project.
Chen Weidong, chief energy researcher of the CNOOC Energy Economics Institute, said high cost of early-stage exploration in unconventional fuels such as oil sands has contributed to the huge losses of Chinese companies' overseas assets.
"Oil sands projects are generally more difficult and expensive to extract than conventional drilling, as it involves a mixture of sand and clay. So when the crude price kept falling, the cost of this process began to take its toll," he said.
Late last year, a Toronto-Dominion Bank report said half of Canadian oil sands producers will be in deficit if the West Texas Intermediate, or WTI, a North American benchmark for crude oil price, kept falling under $44 a barrel.
"Investors in the oil and gas industry need long-term positive cash flow in order to keep a certain scale of investment," Chen said. "At current crude prices, even well-established oil sands projects are struggling to make money."
Other reasons include the misjudgment of the long-term trend of international crude prices and the government's push toward more energy resources in foreign countries, experts said.
"Oil, as a source of fuel, is considered as a scarce resource in China, which relies heavily on oil imports. For this reason, the country is pushing oil companies to embark on huge overseas expansion plans to secure more resources," said Zhao Hongtu, a research professor at the China Institute of Contemporary International Relations, a government-backed think tank.
"Under such circumstances, ensuring the country's energy security is their major task, while higher returns from overseas investments become secondary," he said.
Also, lack of experience in international operations and inappropriate estimates have put the Chinese oil companies under huge pressure. They realized, rather late in the day, that their overseas deals were overpriced.
Gao Jian, a crude oil analyst at commodities consultancy Sublime China Information Co Ltd, said the State-backed companies, when they were snapping up overseas oil and gas assets before 2008, were confident they were getting good bargains. But crude oil prices fell by more than half in 2009 after the global financial crisis.
It started to plummet from $140 a barrel in 2008 and reached $70 in 2009, when China's oil majors were picking up distressed overseas assets. Since then, the crude price descent has continued and, earlier this month, fell below $29 per barrel, the lowest in 12 years.
No one was able to expect that the crude prices would continue to fall over such a long period of time, Gao said. "Crude price is not expected to see a rebound in a short term, not at least for this year and next year, as the level of global oil stocks is already at its peak this year."
Oil stocks in member countries of the Organization for Economic Co-operation and Development, a key indicator of whether the world oil market is tight or well-supplied, already hit the high mark of 3 billion barrels, according to estimates.
As a sharp decline in international crude prices hit upstream earnings, China's oil majors saw their profits slump in the first half of 2015.
But experts said companies such as Sinopec that span the whole industrial chain－that is, both upstream and downstream－would probably suffer less than those that focus only on oilfields.
Gao said Chinese firms need to be prudent in the future and have stricter assessment of investment risks to ensure expansion would not compromise profits.
"If you look at the overseas investments in the past decade, some of them were very irrational, but I don't think it is a bad time for Chinese companies to continue their overseas spending, as there is still a good chance for them to find good deals," he said.
Global oil and gas investments are expected to fall to their lowest in six years in 2016 to $522 billion, following a 22 percent fall to $595 billion in 2015, according to Oslo-based consultancy Rystad Energy.