LEADER'S MESSAGE

Canada is blessed with a natural wealth of oil and gas resources. The country's vast bitumen and shale gas deposits have attracted investment from countries around the world, with state companies in Southeast Asia and China in particular, leading the charge.

Politically stable, Canada's oil and gas industry is technically advanced, well regulated and has a reputation for contractual reliability. In fact, the country is one of the most stable, dependable and democratic of the world's top 10 oil and gas producers. This is a distinct competitive advantage given the turmoil in oil producing nations in North Africa and the Middle East.

With increasing long-term energy demand in emerging and developing economies around the world, many state-owned petroleum companies have already invested large amounts of capital in Canada's oilpatch. That trend will continue and allow capital-intensive oil sands and shale gas projects to move forward.

But how will that investment be viewed by Canadians and the government?

Of late, the Canadian government has had a mixed response to large foreign investment deals. CNOOC Limited's takeover of troubled oil sands developer OPTI Canada Inc., as well as Sinopec International's takeover of Daylight Energy Ltd. have been completed.

But how would the federal government respond to a takeover bid for Syncrude Canada Ltd., Nexen Inc. or Encana Corporation?

The federal government's decision to block U.S. arms maker's Alliant Techsystem's $1.3 billion bid for MacDonald Dettwiler and its clear signal that it would not allow BHP Billiton's $39 billion hostile takeover of Saskatchewan's Potash Corp. (Billiton later decided to pull out of the deal) are perhaps an indication.

As for Canadians themselves, there remain concerns by some that our natural resources are "for sale." Could a rise in economic nationalism jeopardize foreign investment in Canada's oil and gas sector?

With five strong benefits accruing to Canada's petroleum sector through an influx of global capital — detailed in this report — Canadians should welcome, not fear, increased foreign investment in the oilpatch.

As the leading Canadian energy industry professional services firm, PwC Canada's Energy practice has more than 1,000 partners and members delivering industry specific solutions to more than 1,600 energy companies of all sizes. This document is published by PwC as part of our Energy Visions program, a series of publications and events that provide context around issues affecting the oil and gas sector.

Reynold Tetzlaff
National Energy Leader

01 - GREATER MARKET DIVERSIFICATION

If you owned a corner grocery store, you'd naturally be worried if you only had one main customer. For Canada's oil and gas sector, however, that analogy isn't far from the mark. The U.S. is our main customer for both oil and natural gas products.

Many believe it's in Canada's best interest to diversify its markets. Lower demand in the States, increased production of U.S. shale oil and gas, as well as the debate in the States over TransCanada Corporation's proposed Keystone XL pipeline to export bitumen from Alberta to the Gulf Coast, are illustrative of issues and attitudes that could potentially stem exports to our southern neighbour.

While Canada's excellent trade relationship with the U.S. is expected to continue, many believe it's time for the country to also establish stronger relationships with countries in the Asia-Pacific region: Japan, China, Korea, India and others.

The Alberta government has already stated its intention to expand trade and investment with Asia, home of some of the world's largest and most diverse markets, to lessen dependence on the United States.

The increased investment by foreign companies into Canada's oil and gas resources will naturally lead to opportunities to export those resources to a more diverse customer base. As such, there is increased support for export pipelines to Canada's West Coast — for both gas and oil.

On Oct. 13, 2011, the National Energy Board (NEB) approved an application by KM LNG Operating General Partnership for a licence to export liquefied natural gas (LNG) from Kitimat, British Columbia, to markets in the Asia-Pacific region. The 20-year licence opens up a new market for Canadian gas.

Meanwhile, Enbridge Inc.'s proposed Northern Gateway oil pipeline to ship Alberta oil sands crude to the West Coast, for export to Asia-Pacific markets, is also receiving significant attention. During the economic downturn that followed the September 2008 global financial crash, U.S. oil consumption dropped sharply but world demand continued to rise.

02 - INCREASED PRODUCT VALUE

Rising demand for energy in Asia and increases in supply – especially of natural gas in North America — has led to natural gas prices in Asia that are more closely aligned with global oil prices than they are in Canada and the United States (historically Canada's key energy export market). This price diversity, and a desire on the part of Canadian producers and government officials to diversity export markets, together provide a compelling opportunity to seek new export markets for both crude oil and natural gas throughout the Pacific Rim.

In the NEB's decision on the Kitimat LNG terminal, it wrote: "The board recognizes that forecast demand growth for LNG in the Asia-Pacific region provides a new opportunity for Canadian producers to diversify their exports markets. The board also recognizes that long-term sales contracts could provide for higher netbacks to Canadian producers."

The Kitimat LNG partnership — comprised of Apache Canada Ltd., EOG Resources Canada Inc. and Encana Corporation — plans to make a final investment decision in early 2012 and is working toward securing Asian buyers to backstop the LNG export facility. Long-term contract prices for LNG in the Asia-Pacific region typically are priced off of the Japan Customs Cleared index used for long-term crude pricing.

"For Encana, one of the benefits we see this project providing is the opportunity to convert a portion of our natural gas pricing to crude oil-linked pricing," Dave Thorn, Encana's vice-president of Canadian marketing, recently said. "The Kitimat project may be sourced from any of our British Columbia or Alberta natural gas resource plays and we expect it to contribute to an overall increase in natural gas prices to a more sustainable level."

While Encana and PetroChina International Investment Company abandoned plans for a proposed joint venture that would have developed Encana's prized Cutbank Ridge natural gas assets in B.C., the company is still searching for a partner to help develop the play.

Value creation could also occur by converting natural gas to liquids. Talisman Energy Inc. announced that South African-based Sasol Limited will pay $1.05 billion to acquire a 50% working interest in the company's Farrell Creek Montney shale gas assets in northeast B.C. in a strategic partnership. In March, a second deal was announced between the two companies, with Talisman selling a 50% net working interest in its Cypress A Montney natural gas assets for $1.03 billion.

As part of the agreement, the partners have decided to conduct a feasibility study over the next two years around the economic viability of a facility in Western Canada to convert natural gas to liquid fuels, using Sasol's commercial GTL technology. Besides reducing gas competition, the GTL technology takes natural gas and creates premium-priced diesel, naphtha and jet fuel.

03 - ACCELERATED VALUE RECOGNITION

Canada's oil sands and unconventional oil/gas plays require significant capital resources to develop them.

Joint ventures allow Canadian producers to develop existing lands at a faster rate than would be achieved without the additional foreign investment — thereby allowing producers to extract value from their unbooked resources.

"We've got a 20 or 30 year inventory of light oil drilling locations but have got zero on an NPV [net present value] basis," Hillary Foulkes, executive vice-president and chief operating officer at Penn West Petroleum Ltd., recently said. "It doesn't do our shareholders any good for us to be sitting on this for 30 years."

In selecting joint ventures, Penn West identified areas where it didn't have the capital to develop projects in a timely manner. In one deal, announced in May 2010, Chinese sovereign wealth fund China Investment Corporation (CIC) acquired a 45% interest in the company's bitumen assets in the Peace River area of northern Alberta, while a 50/50 deal with Mitsubishi Corporation will help fund development of shale gas assets in the Cordova Embayment area along with certain conventional gas assets in the Wildboy area, both in northeastern British Columbia.

04 - JOB CREATION ACROSS CANADA

Critics of foreign investment or takeovers say it can lead to a hollowed out country as high-paying jobs are exported to overseas countries. But that hasn't happened in Canada's oil and gas sector, where investment has only increased job creation as projects move forward that may otherwise not have proceeded.

And while the oilpatch remains Western Canada's economic lifeblood, its impact can be felt across the entire country and beyond.

Encana Corporation estimates that up to 35,000 jobs are created with every 1% increase in North America's natural gas production.

Meanwhile, the Canadian Association of Petroleum Producers (CAPP) reports that every dollar invested in the oil sands creates about $8 in economic activity, with much of that economic value generated outside Alberta — in Canada, the U.S. and around the world.

CAPP says the oil sands currently affects the jobs of 112,000 people across Canada and this is expected to grow to more than 500,000 jobs within the next 25 years. Many of these will be created in provinces outside of Alberta. Ontario is one of the largest benefactors with 7% of the total jobs from oil sands. British Columbia receives the benefit of 6% of total oil sands jobs and Quebec and Saskatchewan see about 3% each. Oil sands growth will create new jobs in these and other regions across Canada.

05 - TECHNOLOGY TRANSFER

Oilpatch technology transfer is often viewed as a one-way street with technology and operational expertise flowing from Canada to foreign countries.

True, China is moving to develop indigenous gas so its partnerships with Canadian companies developing tight gas/ liquids-rich gas using multi-frac technology brings them up the learning curve.

But Canadian producers can also learn from foreign companies. PetroChina, for instance, already operates many worldclass heavy oil projects at its Liaoning fields — considered some of the most difficult in China — using sophisticated steam-assisted and fireflood techniques. PetroChina also has a very large R&D department working on ways to minimize environmental impacts while maximizing the amount of oil produced.

After China Investment Corporation (CIC) committed to spend $817 million to develop Penn West's bitumen deposits in the Peace River oil sands region of northwest Alberta, company vice-chairman Bill Andrew said CIC has a "tremendous interest" in trading of technology. He said the two companies have been sending technical crews back and forth and that Penn West has been impressed with CIC's reservoir engineering capabilities. Penn West could also benefit from increased access to Chinese-made equipment.

And what of Canadian technology exports?

To look at Canada's enormous exports of hydrocarbons, it is easy to assume they, and they alone, constitute the only important measure of our international trade in oil and gas. In fact, the export of Canadian expertise in producing oil and gas should be recognized as a major trade asset in its own right.

Increasingly, our country's exploration, drilling, production and IT solutions are spreading around the globe. From cold production of heavy oil with sophisticated pumping systems, to thermal in-situ production, to the numerous adaptations such as hydrotransport technology and upgrading techniques that have made surface mining profitable, Canada is an undisputed world leader.

Canadians also export communications solutions; horizontal, automated and coiled tubing drilling technology; hydraulic fracturing techniques; and customized software applications that help exploit resources from shale gas plays.

The globalization of our industry will bring more international companies into contact with the cutting-edge, home-grown technology that could be used around the world, thereby positively impacting Canadian service and supply companies.

SELECTED FOREIGN INVESTMENT HIGHLIGHTS

OIL SANDS

China

Initial Deals

  • In 2005, China National Offshore Oil Corporation (CNOOC) acquired a 16.69% interest in Calgary-based MEG Energy Corp. for $150 million
  • In 2005, Sinopec Corp. purchased Calgary-based Synenco Energy's 40% stake in Total E&P Canada's Northern Lights Oil Sands Project for $105 million
  • In 2005, PetroChina and Enbridge Inc. entered into an MOU to co-operate on the development of Enbridge's Northern Gateway pipeline project, which would ship bitumen to the West Coast and then by tankers to the Asia-Pacific region

2009 Deals

  • In April, Sinopec purchased a 10% interest in Total E&P Canada's Northern Lights Oil Sands Project, adding to the 40% interest it purchased in the project in 2005
  • PetroChina Co. completed a $1.9 billion acquisition of a 60% working interest in the MacKay River and Dover oil sands projects from Athabasca Oil Sands Corp.

2010 Deals

  • The largest transaction in 2010 was Sinopec's acquisition of ConocoPhillips' 9.03% interest in Syncrude Canada Ltd. for $4.65 billion
  • Chinese sovereign wealth fund China Investment Corporation (CIC) committed to spend $817 million to develop Penn West Exploration Ltd.'s bitumen deposits in the Peace River oil sands region of northwest Alberta

2011 Deals

  • CNOOC Limited agreed to acquire troubled oil sands developer OPTI Canada Inc. in a US$2.1 billion deal
  • In January 2012, PetroChina acquired the remaining 40% of the MacKay River project from Athabasca Oil Sands Corp. that it didn't already own

Thailand

  • In 2010, Thai-based PTT Exploration and Production Public Company Limited purchased assets from Norway's Statoil ASA for approximately $2.3 billion, marking Thailand's first foray into the Canadian oil sands industry. PTT acquired a 40% interest in the Kai Kos Dehseh oil sands project. Statoil had acquired a 100% interest in the project through its $2.28 billion acquisition of North American Oil Sands Corp. in 2007

South Korea

  • In 2006, Korea National Oil Corporation (KNOC) acquired Newmont Mining Corp.'s BlackGold oil sands property for $270 million
  • KNOC purchased Harvest Energy Trust late in 2009 for approximately $1.9 billion, including Harvest's oil sands properties in the Peace River and Cold Lake area
  • In August 2010, Korea Investment Corp. paid $50 million for a minor stake in privately-held oil sands developer Laricina Energy Limited
  • In November 2010, Korea Investment Corp. purchased C$100 million worth of shares in privately-held Osum Oil Sands Corp.

Japan

  • In 1978, Japan Canada Oil Sands Ltd., a unit of Japan Petroleum Exploration, acquired stakes in oil sands properties. In 1983, the company launched a pilot thermal project, using steam assisted gravity drainage, at its Hanginstone property
  • In 1992, Mitsubishi Oil Company of Alberta (Mocal) took a 5% stake in the Syncrude Canada Limited project " In July 2006, Japan's Inpex Corp. took a 10% stake in Total's Joslyn oil sands project for an undisclosed price

Norway

  • In 2007, Statoil paid $2.2 billion to acquire Calgary-based North American Oil Sands Corp. (NAOSC)
  • In fall 2010, Statoil commissioned the $350 million Leismer project, achieving first oil in early 2011
  • In November 2010, Statoil sold a 40% interest in its Kai Kos Dehseh oil sands projects to Thailand-based PTT Exploration and Production for $2.28 Billion

France

  • In January 2003, TotalFinaElf acquired a 43.5% stake in the proposed Surmont SAGD project, shared with ConocoPhillips (operator, 43.5%) and Devon Energy (13%). Devon has since divested its interest and Total and Conoco share the venture 50/50
  • In 2005, Total S.A. purchased Deer Creek Energy for $1.35 billion, providing it access to the company's proposed Joslyn project, which included plans for an open-pit mine as well as in situ operations that were ramping up after being commissioned in 2004
  • In August 2008, Total S.A. purchased Synenco Energy for $381 million, giving the company ownership of the proposed 115,000 barrel per day Northern Lights oil sands mine and 100,000 barrel per day Northern Lights upgrader
  • In October 2010, UTS Energy accepted a $1.15 billion takeover offer from Total S.A. Purchasing UTS garnered Total a 20% stake in the undeveloped 190,000 barrel per day Fort Hills oil sands mine controlled by Suncor Energy
  • In December 2010, Total paid $1.75 billion for Suncor's 19.2% interest in the Fort Hills project and a 49% stake in Suncor's Voyageur upgrader in a deal that also saw Suncor get a 36.75% interest in Total's Joslyn project

Netherlands

  • In 2002, Shell Canada marked a major milestone as it commissioned the first new oil sands mine and upgrader to be built in nearly 25 years. The 155,000 barrel per day Athabasca Oil Sands Project (AOSP), which cost about $6 billion, connected an oil sands mine north of Fort McMurray with an upgrader in the greater Edmonton region
  • In June 2006, Shell Canada acquired BlackRock Ventures for $2.4 billion, giving Shell the junior company's Seal oil sands leases in the Peace River region, as well its Orion SAGD project at Cold Lake
  • In 2006, Shell paid $465 million for 10 parcels of land in Alberta's bitumen carbonates, a prospective but potentially giant play. The company has yet to achieve commercial production from these leases

United Kingdom

  • In late 2007, BP announced a $5.5 billion deal with Canada's Husky Energy that created two 50/50 joint ventures in oil sands production and downstream upgrading: the Sunrise SAGD project, operated by Husky, and BP's refinery at Toledo, Ohio
  • In March 2010, BP sold 50% interest in its Alberta oil sands leases at Pike (formerly known as Kirby) to Devon Energy for $550 million, plus a $150 million commitment to fund related capital costs over the next three years
  • Also in March 2010, BP announced its $900 million purchase of a majority ownership stake in private company Value Creation Inc.'s proposed Terre de Grace project

SHALE GAS

Deals involving foreign investment in Canada's shale gas industry include:

Malaysia

  • In June 2011, Calgary-based Progress Energy Resources Corp. announced it had struck a strategic partnership with the Malaysian national oil company, PETRONAS, to develop a portion of its large Montney shale gas assets in northeast British Columbia, which could eventually be exported as LNG by the two companies under the joint venture. The purchase price was $1.07 billion (including a capital funding commitment)

South Africa

  • In June 2011, South African petrochemicals group Sasol Ltd. completed a C$1.03 billion shale gas acquisition from Talisman Energy Inc. Sasol acquired a 50% stake in Talisman's Cypress A acreage in the Montney Basin in northeastern British Columbia, where the company had previously purchased a stake in Talisman's Farrell Creek assets

Japan

  • In August 2010, Japan's Mitsubishi Corporation agreed to spend $850 million under a joint venture with Penn West Petroleum Ltd. to develop shale gas in the Cordova Embayment and conventional natural gas in the Wildboy area of northeast B.C.

South Korea

  • In February 2010, South Korea's Korea Gas Corporation (KOGAS) bought into Encana Corporation's Canadian gas assets for a planned investment of $565 million
  • In July 2011, Encana expanded its Horn River farm-out agreement with the Canadian subsidiary of KOGAS at Kiwigana in northeast British Columbia. KOGAS agreed to invest a further $185 million

China

  • In October 2011, Sinopec announced its intention to acquire Daylight Energy in a $2.2 billion deal that closed in December

FUTURE INVESTMENTS

While there has been no indication to date of Brazilian interest in Canada's oil and gas sector, India is increasingly interested in acquiring North American assets.

In September 2011, Indian state-run GAIL India agreed to buy a 20% stake in Carrizo Oil & Gas Inc.'s Eagle Ford shale gas assets. GAIL said it "will consider expanding its business portfolio in the North American market by pursuing various upstream and midstream opportunities including LNG export to India," chairman B.C. Tripathi said in a statement.

In 2010, Indian energy major Reliance Industries struck three shale gas joint ventures in the United States, including a US$1.7 billion deal with Atlas Energy to own 40% of its Marcellus shale operations.

To date, no India-based company has made a significant foray into Canada's oil and gas sector, although Reliance was reportedly interested in Alberta-based Value Creation Inc., before its deal with BP Canada.

Many believe India is closely watching plans by Canadian companies to build bitumen or gas pipelines to the West Coast. As those plans move along, it will open up attempts by Indian oil and utility companies to invest in Canada.

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