OREANDA-NEWS. July 25, 2011. China's largest offshore oil and gas producer plans to spend USD 2.1 billion US buying Opti Canada Inc. in a move expected to inject cash into the troubled Long Lake oilsands project, in which the beleaguered Calgary firm has a stake.

The deal announced by state-owned China National Offshore Oil Corp. and Opti on Wednesday, which covers off much of Opti's soaring USD 2.7-billion debt and includes a payment of USD 34 million - or 12 cents per share - to shareholders, is the latest in a string of investments in recent years by the resource-hungry Middle Kingdom in Alberta's oilsands.

CNOOC's bid for Opti represents the second largest Chinese investment in Canada's oilpatch after Beijing-based refining giant Sinopec Corp. spent USD 4.6 billion in April 2010 on a nine per cent stake in Syncrude Canada Ltd., but not including the USD 5.4-billion joint venture scrapped last month between Encana Corp. and a subsidiary of China's largest oil and gas company PetroChina Co. Ltd. to develop the Calgary firm's northeastern B.C. Cut-bank Ridge shale gas play.

Wednesday's agreement, which earned unanimous approval by Opti's board, comes less than a week after the insolvent firm filed for creditor protection under the Companies' Creditors Arrangement Act and negotiated a deal with bondholders to exchange their notes for new shares to reinvest USD 375 million into the company.

The proposed transaction with CNOOC, which will be included in CCAA proceedings, supersedes the recapitalization bondholders were considering, as it's deemed superior.

Expected to close in the fourth quarter, the deal must first receive the nod from a majority of Opti's secured creditors, as well as approval by governments in China and Canada and court approval in Alberta; Opti shareholders are not expected to vote on the arrangement.

The investment by CNOOC, the firm's second in the oilsands after its USD 150-million purchase of a stake in Calgary-based oilsands player MEG Energy Corp., in 2005, is another signal of China's interest in Alberta's oilsands.

Energy Minister Ron Liepert called the investment "very good news for Alberta" in an interview.

"It's a continuing indication that the world is interested in the resource," Liepert said.

CNOOC, which currently holds 14.9 per cent of MEG, has been eyeing another oilsands deal for a long while, according to University of Alberta associate political science professor Wenran Jiang, who is well connected in the energy sector.

Jiang, a senior fellow at the Asia Pacific Foundation of Canada, said CNOOC's bid is evidence the failed joint venture between Encana and PetroChina is not indicative of overall Chinese sentiment about the oilpatch.

"Chinese oil and gas companies are still looking for deals," Jiang said.

CNOOC will take over Opti's 35 per cent interest in four Alberta oilsands projects - Long Lake, Kinosis, Leismer and Cottonwood, which together have proven reserves of 195 million barrels of bitumen.

Calgary-based Nexen Inc., which operates Long Lake and has a 65 per cent stake in the project - the only of Opti's assets that is producing - has found financial certainty in Opti's deal with CNOOC, said company spokesman Pierre Alvarez, calling the agreement a "positive development" for Nexen.

"The oilsands is a very capitalintensive business," Alvarez noted, adding the firm's near-term plans outlined last week in its second quarter results won't change.

Long Lake, a project which includes a steam-assisted gravity drainage operation and an upgrader had its grand opening in October 2008, but has since underperformed, struggling to come anywhere close to meeting its maximum production capacity of 72,000 barrels of upgraded bitumen per day.

Nexen is looking to drill 60 new well pairs to boost production at the flagging project over the next three years.

Any thoughts of ramping up development with cash from a new wealthy partner would be examined after the deal closes.

"Those are decisions that will be taken once the transaction is complete," Alvarez said.

Kam Sandhar, a research analyst who covers Nexen for Calgary-based investment bank Peters & Co. Ltd., said CNOOC's deep pockets might mean acceleration of future phases of development and should help Nexen cover even its near-term development plans, which he said would take "a fair chunk of capital."

Jiang said the new partnership with Nexen opens the door for future joint ventures to develop Western Canadian shale gas plays between CNOOC and the Calgary firm, which has been on the hunt for Asian investors flush with cash.

Chris Slubicki, president and CEO of Opti, argued the deal with CNOOC is in the best interests of all stakeholders.

"Our asset base requires a technically strong and financially strong company to develop the assets successfully going forward and I think we found that in CNOOC," Slubicki said.

He said the fact shareholders would recover any value from the firm's restructuring, rare in CCAA proceedings that favour secured creditors, is a tribute to the goodwill of those creditors who agreed investors should recoup some of their money.

"I give full credit to our bondholders," Slubicki said.

The executive acknowledged Opti has been looking for nearly two years to address a burdensome debt and said ongoing discussions with CNOOC only reached the point of a deal recently, noting the agreement would have proceeded under CCAA even if Opti had not filed last for creditor protection last week, since CNOOC's offer does not completely repay all debts.

The third-largest among China's big four state-owned energy companies, CNOOC - publicly traded in New York and Hong Kong - is also a beast among global oil and gas exploration and production firms, with 2010 production of 901 million barrels of oil equivalent per day and year-end proved reserves of about three billion barrels of oil equivalent.

Though not pocket change for CNOOC, USD 2.1 billion in the oilsands pales in comparison to the USD 18.5 billion the company tried to spend in 2005 when it bid to buy California-based oil and gas producer Unocal Corp., an offer the firm withdrew after a political firestorm erupted in the United States over security fears.

After the failure of the Unocal bid, CNOOC had cash to burn, which it spent on global investments, most notably in Africa.

China'sAlberta investments

June 2011: Encana's sale of 50 per cent of its B.C. Cutbank Ridge natural gas play to PetroChina for USD 5.4 billion falls through.

Feb 2011: The bank of China, one of the country's largest banks announces it is opening a Calgary branch.

May 2010: China Investment Corp. injects USD 1.25 billion into Penn West Energy to develop the trust's oilsands assets in the Peace River region.

April 2010: Sinopec purchases ConocoPhillips' nine per cent stake in Syncrude for USD 4.65 billion.