By JACQUIE McNISH and PATRICK BRETHOUR From Friday's Globe and Mail
The Chinese government is in discussions to acquire Calgary-based oil and gas giant Husky Energy Inc. from Hong Kong billionaire Li Ka-shing, in the emerging Asian power's latest move to deepen its economic ties with resource-rich countries such as Canada.
Sources familiar with the talks said representatives from the Li family and China entered negotiations for what would be a multibillion-dollar takeover several weeks ago in Beijing and Hong Kong.
China is understood to be seeking to acquire full control of Husky through one of its state-owned energy companies, but it was unclear which agency might make the bid. State-controlled PetroChina Co. Ltd. discussed a possible acquisition of Husky with the Li family two years ago, but the talks foundered on price.
Husky's stock has risen sharply in recent weeks on heavy trading amid takeover rumours and a continuing rally in energy shares. The company's shares closed yesterday on the Toronto Stock Exchange at $33.37, up 25 cents, giving Husky an indicated takeover price of more than $14-billion if all its shares are acquired.
The Li family controls about 71 per cent of Husky's shares through personal holdings and their Hong Kong company, Hutchison Whampoa Ltd. A spokeswoman for Hutchison was unavailable yesterday; a spokesman for Husky declined to comment.
China has embarked on a global hunt to secure resources for its booming economy. Chinese state firms are already active in Sudan and Peru, and are scouting investment opportunities in other countries, including Ecuador, Chile, Australia and Venezuela.
Canada's oil sands have been scrutinized as well. This summer, a delegation of Chinese executives and engineers visited oil-sands firms, including Husky. Alberta Premier Ralph Klein said last month that he understood that the delegation was reviewing possible investments with Beijing.
China, an oil exporter until 1993, is an increasingly important consumer, with some projections pointing to a doubling of imports by the end of the decade. China's growing thirst for oil has helped propel energy prices this year.
For Canadians from Ontario to Vancouver Island, Husky's most familiar face is its 550 Husky and Mohawk gas stations. But the company's operations run from China and Indonesia to Western Canada to offshore oil production in Atlantic Canada. The company also has ambitions in Alberta's oil sands, with plans to begin production from its Tucker Lake project in the third quarter of next year, with a second, larger operation starting up later in the decade, if regulatory approvals are granted.
China is also in discussions to acquire Toronto mining giant Noranda Inc. through its state-owned mining company China Minmetals Corp. People familiar with the Noranda and Husky negotiations said they expect the talks will be prolonged because they involve several layers of Chinese officials who are very cautious.
"China is making its first major foray in the West and they are being extremely careful in their negotiations. They want to generate the impression that they are getting the best deal possible," said one person familiar with the Noranda discussions.
Although the Noranda bid triggered concern in Ottawa about losing domestic control of the resource company, sources close to the Husky talks said they did not anticipate controversy because Mr. Li has owned the Calgary company since 1989.
"This company is already foreign-owned, it is not a Canadian trophy asset going overseas," one said.
Husky has held negotiations with a series of suitors such as PetroChina and France's Total SA in the past three years. Those potential bidders walked away because they did not share the Li family's aggressive valuations of the company's oil and gas assets.
Last month, Canning Fok, Husky's managing director, said the company had been approached but the offers were not rich enough.
A major stumbling block in previous takeover discussions has been the value the Li family has placed on Husky's planned White Rose oil megaproject off the coast of Newfoundland. Husky has a 72-per-cent interest in the project and until recently bidders were reluctant to attach much value to it because its oil reserves were still being evaluated.
As Husky moves closer to starting production, currently slated for late 2005 or early 2006, it has firmed its estimates for the size of the reserves. Previously, the company has said that White Rose contains 165 million barrels of probable reserves, essentially a less certain estimate of the amount of oil that can be eventually extracted.
But Husky said yesterday that 20 million barrels have, in the third quarter, been moved to the "proved" category, the most reliable estimate. Company spokesman Don Campbell said yesterday that Husky could add an additional 15 million barrels to the proved category before production begins.
Wilf Gobert, an analyst and vice-chairman at Peters & Co. Ltd., said the proven reserves are "a vindication" for Husky in the face of skepticism over the project.
Mr. Gobert said he was not aware of any new offer for Husky, but that previous suitors failed to strike an agreement on price. Total's attempt in the fall of 2001 withered after the French company floated an offer of $24 a share, while Husky held out for $27.
Sources close to the Husky talks said the improved reserves outlook at White Rose has brought Chinese negotiators closer to the price the Li family is seeking. As well, China has the added advantage of being able to offer Mr. Li the opportunity to co-invest in future projects.
China Emerging as U.S. Rival for Canada's Oil By SIMON ROMERO
Published: December 23, 2004
CALGARY, Alberta, Dec. 21 - China's thirst for oil has brought it to the doorstep of the United States.
Chinese energy companies are on the verge of striking ambitious deals in Canada in efforts to win access to some of the most prized oil reserves in North America.
The deals may create unease for the first time since the 1970's in the traditionally smooth energy relationship between the United States and Canada.
Canada, the largest source of imported oil for the United States, has historically sent almost all its exports of oil south by pipeline to help quench America's thirst for energy. But that arrangement may be about to change as China, which has surpassed Japan as the second-largest market for oil, flexes its muscle in attempts to secure oil, even in places like the cold boreal forests of northern Alberta, where the oil has to be sucked out of the sticky, sandy soil.
"The China outlet would change our dynamic," said Murray Smith, a former Alberta energy minister who was appointed this month to be the province's representative in Washington, a new position. Mr. Smith said he estimated that Canada could eventually export as many as one million barrels a day to China out of potential exports of more than three million barrels a day.
"Our main link would still be with the U.S. but this would give us multiple markets and competition for a prized resource," Mr. Smith said. Delegations of senior executives from China's largest oil companies have been making frequent appearances in recent weeks here in Calgary, Canada's bustling energy capital, for talks on ventures that would send oil extracted from the oil sands in the northern reaches of the energy-rich province of Alberta to new ports in western Canada and onward by tanker to China.
Chinese companies are also said to be considering direct investments in the oil sands, by buying into existing producers or acquiring companies with leases to produce oil in the region. In all, there are nearly half a dozen deals in consideration, initially valued at $2 billion and potentially much more, according to senior executives at energy companies here.
One preliminary agreement could be signed in early January. A spokesman for the Department of Energy in Washington said officials were monitoring the talks but declined to comment further.
China's appetite for Canadian oil derives from its own insatiable domestic energy demand, which has sent oil imports soaring 40 percent in the first half of this year over the period a year ago. China's attempts to diversify its sources of oil have already led to several foreign exploration projects in places considered on the periphery of the global oil industry like Sudan, Peru and Syria.
In Calgary, however, the negotiations with China have focused on the oil sands, an unconventional but increasingly important source of energy for the United States. Higher oil prices have recently made oil sands projects profitable, justifying the expense of the untraditional methods of producing oil from the sands. Large-scale mining and drilling operations are required to suck a viscous substance called bitumen out of the soil.
"China's gone after the low-hanging fruit so far," said Gal Luft, a Washington-based authority on energy security issues who is writing a book on China's search for oil supplies around the world. "Now they're entering another level of ambition, in places such as Venezuela, Saudi Arabia and Canada that are well within the American sphere."
Canada's oil production from the sands surpassed one million barrels a day this year and was expected to reach three million barrels within a decade. The bulk of output is exported to the Midwestern United States. That flow pushed Canada ahead of Saudi Arabia, Mexico and Venezuela this year as the largest supplier of foreign oil to the United States, with average exports of 1.6 million barrels a day.
Even so, there is the perception among many in Alberta's oil patch that Canada's rapidly growing energy industry remains an afterthought for most Americans. That might change, industry analysts say, if Canada were to start exporting oil elsewhere.
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