CHINA’S CRUDE AWAK­EN­ING

China’s re­turn to Al­berta

The Globe and Mail (Alberta Edition) - - FRONT PAGE -

Five years af­ter Ot­tawa put the brakes on for­eign takeovers of Canada’s largest oil pro­duc­ers, a new wave of Chi­nese in­vestors is qui­etly buy­ing up small, dis­tressed Al­berta com­pa­nies. Jeff Lewis and Jef­frey Jones re­port from Cal­gary and Nathan VanderKlippe re­ports from Beijing on the lat­est, and very pri­vate, oil patch profit seek­ers

Five years af­ter Ot­tawa put the brakes on a surge of for­eign in­vest­ment, China is back. A new wave of Chi­nese in­vestors is qui­etly snap­ping up a host of en­ergy com­pa­nies in the wake of the in­dus­try slump. Jeff Lewis, Jef­frey Jones and Nathan Van­der-Klippe re­port on a stealthy takeover binge in the oil patch

JEFF LEWIS JEF­FREY JONES NATHAN VANDERKLIPPE BEIJING

The ag­ing ranch-style house in subur­ban Cal­gary with the view of the Rocky Moun­tains doesn’t look like a beach­head in a new wave of Chi­nese in­vest­ment in Canada’s oil patch. The in­ter­com at the foot of a loop­ing drive­way is bro­ken. Scraps of wood and old camp­ing chairs lay about cracked as­phalt. The roof shin­gles are weath­ered and start­ing to cup.

But for a time, it served as the Cana­dian head­quar­ters of Shang­hai En­ergy Corp., at least on pa­per. Last fall, Shang­hai En­ergy and an af­fil­i­ated num­bered com­pany also listed at the Spring­bank-district ad­dress bought oil and gas prop­er­ties from En­durance En­ergy Ltd., a Cal­gary-based pro­ducer that, un­able to pay its bills, sought bank­ruptcy pro­tec­tion in the spring of 2016. It owed banks roughly $221-mil­lion.

The deal’s backers are among a new breed of Chi­nese in­vestors who are plow­ing fresh funds into Cana­dian en­ergy com­pa­nies in a takeover binge that has largely es­caped pub­lic no­tice.

Feast­ing on as­sets from debt-hob­bled do­mes­tic pro­duc­ers and com­pa­nies in re­ceiver­ship, a hand­ful of well-con­nected Chi­nese fi­nanciers and oil ex­ec­u­tives has spent nearly $2-bil­lion in a se­ries of deals since Ot­tawa im­posed re­stric­tions on buy­ing by state-owned en­ter­prises in 2012, a move thought to have soured China on the Cana­dian oil patch.

Spy­glass Re­sources Corp., New Star En­ergy Ltd., Twin Butte En­ergy Ltd., Hype­r­ion Ex­plo­ration and other small to mid-size oil and gas pro­duc­ers have been snapped up with pri­vate Chi­nese cap­i­tal amid the en­er­gyin­dus­try down­turn.

The in­vestors and sev­eral go­b­e­tweens who scout out op­por­tu­ni­ties and en­list over­seas cap­i­tal guard their pri­vacy closely and tend to look for deals that are be­low the value that would trig­ger a re­view by In­vest­ment Canada, a Globe and Mail in­ves­ti­ga­tion found.

In­vest­ment bankers say groups of such suit­ors, who op­er­ate out­side the con­fines of big­name state oil com­pa­nies, such as PetroChina, CNOOC Ltd. and Sinopec, have turned up at most re­cent as­set sales in Cal­gary, us­ing var­i­ous cor­po­rate names.

In an in­di­ca­tion of how new some of the play­ers are to Al­berta and its main in­dus­try, sev­eral have reg­is­tered com­pa­nies in subur­ban homes be­fore tak­ing up space in the sprawl of down­town Cal­gary real es­tate left va­cant by re­treat­ing do­mes­tic ri­vals. Shang­hai En­ergy, led by China-born and Univer­sity of Cal­gary-ed­u­cated fi­nancier Wen­tao Yang, has since re­lo­cated to an of­fice tower along­side es­tab­lished en­ergy com­pa­nies while adding to its hold­ings.

The in­flux of cap­i­tal, tal­lied through pub­lic state­ments, cor­po­rate reg­is­tra­tions, court doc­u­ments, con­fi­den­tial bro­ker­age re­ports as well as in­ter­views with in­dus­try ex­ec­u­tives and in­vest­ment bankers, is led by an ar­ray of small com­pa­nies that share di­rec­tors and ad­dresses, in­clud­ing some in the Bri­tish Vir­gin Is­lands, a noted tax haven – all with ori­gins in China.

They now em­ploy hun­dreds of do­mes­tic em­ploy­ees and pro­duce more than 100,000 bar­rels of oil equiv­a­lent a day, vir­tu­ally all from con­ven­tional oil and gas de­posits.

It shows that, far from dis­ap­pear­ing, Chi­nese in­vest­ment in Canada’s oil patch has shifted from high-cost oil sands projects, which had been the tar­get of block­buster deals by the state-owned gi­ants, to smaller ac­qui­si­tions that garner few head­lines. At least some of the buy­ing is mo­ti­vated by a de­sire to trans­fer money into hard for­eign cur­rency be­yond the reach of au­thor­i­ties in Beijing, ac­cord­ing to a re­cent pro­pri­etary re­port from a ma­jor Cana­dian bank.

That has prompted com­par­isons to the spike in for­eign in­vest­ment that en­veloped Van­cou­ver’s real es­tate mar­ket, and pushed up hous­ing prices to the point where the pro­vin­cial gov­ern­ment stepped in with tax mea­sures to slow the rush.

How­ever, since the col­lapse in oil prices in late 2014, there has been no short­age of po­ten­tial buys in en­ergy and the flow of cap­i­tal has had lit­tle dis­tort­ing ef­fect on as­set val­ues.

“You had PetroChina and Sinopec and a lot of the big com­pa­nies in here buy­ing out oil sands re­serves, pri­mar­ily,” said Tom Buchanan, for­mer chief ex­ec­u­tive officer of Spy­glass Re­sources. “Now, the new wave is a lot of th­ese fam­ily busi­nesses, where guys have made a ton of money in China.”

Spy­glass was pur­chased in the spring of 2016 by an en­tity called SanLing En­ergy Ltd., led by chief ex­ec­u­tive officer Shuo Shi. Ac­cord­ing to cor­po­rate reg­is­tra­tion forms, the com­pany’s prin­ci­pal share­hold­ers are Jeremy Song and Yuhan Song. Court doc­u­ments put the price at $59.7-mil­lion, less than half the $172-mil­lion Spy­glass owed lenders when the ju­nior oil com­pany was pushed into re­ceiver­ship the pre­vi­ous fall.

Mr. Shi is among such other ac­tive in­vestors as Beijing-based oil ex­ec­u­tive Tianzhou Deng, chair­man of Shang­hai-listed com­pressed nat­u­ral gas firm Changchun Si­noen­ergy Corp., and Mr. Yang. Other com­pa­nies that have bought as­sets since the clam­p­down on state-owned en­ter­prises (SOEs) have in­cluded TriWin In­ter­na­tional In­vest­ment Group and China Oil & Gas Group.

In the past decade, SOEs spent tens of bil­lions of dol­lars in Canada as Beijing sought to se­cure re­serves around the world to fuel eco­nomic growth.

The $15.1-bil­lion (U.S.) takeover of Nexen Inc. by CNOOC Ltd. raised some wor­ries, in­clud­ing among mem­bers of for­mer prime min­is­ter Stephen Harper’s cab­i­net, that con­trol of the coun­try’s oil sands was be­ing ab­sorbed by arms of for­eign gov­ern­ments, in­clud­ing China’s. Mr. Harper ap­proved the takeover of Nexen and its Long Lake oil sands project but ruled that fur­ther bids for con­trol of such as­sets were off-lim­its.

China’s ap­petite with­ered amid the po­lit­i­cal back­lash in Canada, and op­er­a­tional dis­ap­point­ments plagued buy­ers, too, rais­ing ques­tions about whether they over­paid.

The SOE clam­p­down has since been raised by Beijing in free­trade talks with the Cana­dian gov­ern­ment. Chi­nese en­voys have pressed Ot­tawa for un­fet­tered ac­cess to key sec­tors of the do­mes­tic econ­omy, in­clud­ing Al­berta’s oil patch.

Since the oil crash, how­ever, the in­flux of pri­vate money has helped Cana­dian lenders stem losses on soured loans that be­came an epi­demic. Op­por­tu­ni­ties have been plen­ti­ful.

“The Chi­nese have a true global suite of op­por­tu­ni­ties pre­sented to them. Every in­vest­ment banker on the planet has been mak­ing their way to Beijing, Shang­hai, Hong Kong for a long pe­riod of time – 15-plus years,” said Adam Water­ous, who made ex­cur­sions to the coun­try as a top in­vest­ment banker with Bank of Nova Sco­tia be­fore leav­ing to found Water­ous En­ergy Fund.

“It’s a well-trod­den path. If you’ve got some­thing in the North Sea or some­thing in West Africa, all roads lead to China,” Mr. Water­ous said. “What’s in­ter­est­ing is that pri­vate-sec­tor Chi­nese in­vestors are treat­ing Canada fre­quently as a pre­ferred des­ti­na­tion.”

Few of the play­ers are well known and many are reluc­tant to speak to the media. In April, SanLing’s Mr. Shi abruptly can­celled a sched­uled in­ter­view, then hung up on a re­porter try­ing to resched­ule. A LinkedIn pro­file be­long­ing to Shang­hai En­ergy’s Mr. Yang dis­ap­peared from the site af­ter The Globe ex­changed sev­eral mes­sages with him.

Be­sides his role at Shang­hai, it de­scribed him as the pres­i­dent and chief ex­ec­u­tive of an­other com­pany called Rock­yview Re­sources Inc. Court doc­u­ments show it bought B.C. nat­u­ral gas as­sets from bank­rupt Quick­sil­ver Re­sources Canada Inc. Mr. Yang is also listed as found­ing part­ner of Kailas Cap­i­tal Ltd.

Pri­vately, as­so­ciates com­pare Mr. Yang with some of Cal­gary’s most prom­i­nent mer­chant bankers, such as Brett Wil­son and Mur­ray Ed­wards, when they were strik­ing their early deals in the 1990s. Known for an im­pres­sive net­work of in­vestor con­tacts, he has fig­ured in nu­mer­ous trans­ac­tions, putting cap­i­tal to­gether to buy up as­sets

It’s a well-trod­den path. If you’ve got some­thing in the North Sea or some­thing in West Africa, all roads lead to China. What’s in­ter­est­ing is that pri­vate-sec­tor Chi­nese in­vestors are treat­ing Canada fre­quently as a pre­ferred des­ti­na­tion.

Adam Water­ous Found­ing part­ner of Water­ous En­ergy Fund

and set­ting up man­age­ment teams to op­er­ate them.

Reached by e-mail, Mr. Yang would not dis­cuss his in­vest­ments, cit­ing pri­vacy con­cerns. “We are a pri­vate Cana­dian com­pany and pre­fer to main­tain our pri­vacy as we are en­ti­tled, to the ex­tent pos­si­ble,” he said.

He said Shang­hai’s par­ent com­pany, China En­ergy Re­serve and Chem­i­cals Group Co. Ltd., is un­der­go­ing a pub­lic list­ing process in China, which also pre­vents him from mak­ing pub­lic state­ments.

His ac­tiv­ity ap­pears to over­lap at times with Changchun Si­noen­ergy’s Mr. Deng. Mr. Yang is listed in reg­istry fil­ings as a di­rec­tor at Mr. Deng’s Si­noen­ergy Pa­cific Corp. and on his LinkedIn pro­file as a di­rec­tor of New Star En­ergy.

Si­noen­ergy Pa­cific pur­chased New Star in 2015 for $170-mil­lion (Cana­dian), plus the as­sump­tion of $45-mil­lion in debt. The com­pany is an af­fil­i­ate of Cal­gary Si­noen­ergy In­vest­ment Corp., which in turn is con­trolled by Si­noen­ergy Oil In­vest­ment Ltd., cor­po­rate reg­is­tra­tion doc­u­ments show.

That com­pany shares an ad­dress used by dozens of firms in the Bri­tish Vir­gin Is­lands, a cor­po­rate se­crecy and tax haven, ac­cord­ing to a trove of leaked fi­nan­cial and le­gal doc­u­ments known as the Panama Pa­pers. Mr. Deng is also listed as a ben­e­fi­ciary of BVI com­pany Price­line In­vest­ments Ltd. Among its share­hold­ers are Qing­dao Si­noen­ergy Corp. as well as an­other firm that shares a Hong Kong ad­dress with a com­pany that con­trols Shang­hai En­ergy.

The use of an off­shore com­pany by it­self is no in­di­ca­tion of wrong­do­ing, but it can ef­fec­tively ob­scure a firm’s true own­ers. In Cal­gary, bankers in­den­ti­fied New Star’s ac­quirer as a unit of Shang­hai-listed Changchun Si­noen­ergy, the same com­pany that bought fi­nan­cially trou­bled Long Run Ex­plo­ration in 2016.

The price tag in that deal, which re­quired fed­eral ap­provals, was $100-mil­lion, a whop­ping 215-per-cent pre­mium, plus the as­sump­tion of roughly $600-mil­lion in Long Run debt. A Changchun Si­noen­ergy af­fil­i­ate also re­cently closed the ac­qui­si­tion of bank­rupt Twin Butte En­ergy, pay­ing more than $260-mil­lion.

Changchun Si­noen­ergy is far from a house­hold name in down­town Cal­gary even though it now em­ploys about 400 peo­ple, in­clud­ing con­trac­tors, and pro­duces as much as 50,000 bar­rels of oil equiv­a­lent a day. And there is likely no big­ger player in the oil patch who is less well known than its 60year-old chair­man, Mr. Deng.

Yet, Mr. Deng trav­els in dis­tin­guished com­pany. Fol­low­ing a visit to Ot­tawa by Chi­nese Premier Li Ke­qiang last fall, a press re­lease from Prime Min­is­ter Justin Trudeau’s of­fice touted a com­mit­ment by Changchun Si­noen­ergy to in­vest $500-mil- lion into Long Run over the next two years – an out­sized sum dur­ing a slump that has forced com­peti­tors to slash spend­ing.

A spokesman for the PMO said Mr. Deng was not part of the premier’s del­e­ga­tion. How­ever, pho­tos posted on the WeChat ac­count of the China Con­struc­tion Bank show Mr. Deng at a sign­ing cer­e­mony with the bank’s Toronto branch man­ager, with the premier and Mr. Trudeau in the back­ground.

Mr. Deng over­sees a grow­ing sta­ble of Cana­dian in­vest­ments from Changchun Si­noen­ergy’s head of­fice on the 29th floor of the swoop­ing Zaha Ha­did-de­signed Wangjing Soho, one of Be­jing’s more strik­ing of­fice com­plexes. In­side, a staff of 100 works at cu­bi­cles. A sign near the front desk says “car­ry­ing out de­ci­sions with high ef­fi­ciency, build­ing ca­reers.”

The spend­ing is far from over. By the end of this year, Si­noen­ergy ex­pects to build up pro­duc­tion to 70,000 bar­rels a day, ris­ing to 100,000 by 2018, said Hu Hai, a con­sul­tant for the com­pany, in an in­ter­view. That will vault the firm into “the top 20 in Canada,” Mr. Hu said.

Op­er­at­ing from China, he said, Si­noen­ergy can ben­e­fit from cheaper labour and an un­sen­ti­men­tal ap­proach to the Cana­dian oil­patch, which Mr. Hu faults for get­ting fat on the good times. “We fired many high-level man­agers. We sim­pli­fied man­age­ment teams and re­duced those costs,” he said. He fig­ures the com­pany can turn a tidy profit with U.S. oil prices as low as $48 (U.S.).

“Why do so many oil com­pa­nies lose money? It’s be­cause of heavy fi­nan­cial costs, prop­erty de­pre­ci­a­tion and man­age­ment costs. The CEO of a small oil com­pany might en­joy a $500,000 (Cana­dian) an­nual salary. He also has many vice pres­i­dents en­joy­ing lux­ury of­fices. It’s all very high cost.”

Changchun Si­noen­ergy ben­e­fits from cheap cap­i­tal at Chi­nese banks, he said, and from net­works of in­vestors with cash to spare and a de­sire to find a safe place for it. None of Si­noen­ergy’s in­vestors are in Canada, he said.

He iden­ti­fied Price­line as “one of our com­pa­nies,” used for tax pur­poses but also be­cause of Cana­dian scru­tiny on Chi­nese money. “Some­times, Chi­nese in­vestors have to in­vest in Canada by set­ting up a com­pany in the BVI,” he said. It is re­lated to “pass­ing fed­eral gov­ern­ment checks a bit faster.” Si­noen­ergy has sim­i­larly worked with other Chi­nese com­pa­nies in buy­ing Cana­dian en­ergy as­sets. Mr. Hu called Shang­hai En­ergy a “part­ner” and said SanLing “is us.”

Some oil ex­ec­u­tives in Cal­gary say the Chi­nese in­vestors are bring­ing cap­i­tal to an in­dus­try that sorely needs it, as other sources have moved on to other oil- and gas-rich basins, such as the Per­mian in Texas.

Many are also keen to es­tab­lish them­selves as cred­i­ble op­er­a­tors in a ma­ture re­gion as oil prices be­gin to firm up. Some even aim to ship phys­i­cal bar­rels of oil back to China, prof­it­ing from a new open­ing across the Pa­cific for pri­vate firms to im­port crude.

“They have the abil­ity to ex­e­cute a deal and close a deal,” for­mer New Star chief ex­ec­u­tive Steve Su­gianto said. “They bring the money. That’s pretty good.”

This month, more Chi­nese cap­i­tal snapped up oil and gas as­sets, lo­cated in north­west­ern Al­berta, ac­cord­ing to well-placed in­dus­try sources. This time, the sell­ers were com­pa­nies in the sta­ble of Cal­gary’s wealthy Rid­dell fam­ily. Para­mount Re­sources Ltd. un­loaded $150-mil­lion worth of prop­er­ties and Tril­ogy En­ergy Corp. di­vested $50-mil­lion worth. Jim Rid­dell, who is chief ex­ec­u­tive officer of both com­pa­nies, de­clined to name the buyer when con­tacted for com­ment.

The in­vest­ments are part of a wider out­ward flow from China’s bor­ders that has raised con­cerns among se­nior gov­ern­ment of­fi­cials in Beijing. In­deed, the de­mand has spawned a new sub-in­dus­try of go-be­tweens in Cal­gary who seek out po­ten­tial in­vest­ments then go about rais­ing cap­tial to buy them from their con­tacts in China.

Robert Kwauk, the Beijing man­ag­ing part­ner at Blake Cas­sels & Gray­don LLP, said he oc­ca­sion­ally re­ceives in­quiries from what he calls “re­ally, re­ally small” Chi­nese buy­ers, peo­ple who iden­tify them­selves as rep­re­sent­ing in­vest­ment com­pa­nies or pri­vate eq­uity funds.

“They’re cer­tainly not oil com­pa­nies – they’re just re­ally non­ames,” Mr. Kwauk said.

But they want to know about buy­ing small oil and gas com­pa­nies in Al­berta, the kind that might have only a few wells, but none­the­less pump out reg­u­lar bar­rels. That can make for favourable math.

“If you buy a house in Van­cou­ver for, say, $3-mil­lion, you get a very av­er­age house,” said Mr. Kwauk, a re­spected and well-con­nected lawyer in Beijing. By com­par­i­son, in Al­berta, “for $3-mil­lion, you can get a small pro­duc­ing as­set that spins out reg­u­lar cash flow.”

JA­SON FRAN­SON/THE GLOBE AND MAIL

JA­SON FRAN­SON/THE GLOBE AND MAIL

Changchun Si­noen­ergy bought this oil op­er­a­tion just north­west of Ed­mon­ton.

JA­SON FRAN­SON/THE GLOBE AND MAIL

In 2016, Changchun Si­noen­ergy bought fi­nan­cially trou­bled Long Run Ex­plo­ration, which has op­er­a­tions near Ed­mon­ton.

DAR­LEY SHEN/REUTERS

Sinopec was among the first wave of Chi­nese com­pa­nies that bought into Canada’s oil patch.

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