China Vs. United States: War Of The Oil Sands

by: Michael J. Ray

If one was to pay attention to current political/military events, it would be hard to miss the coming rise to power of China. This nation of 1.3 billion people has been on a rapid growth rate of both economic and military might in recent years. Just recently China introduced its own version of a stealth fighter aircraft and its first aircraft carrier, which used to be the”Varyag" from the Russian Navy. On top of these recent developments, add a very sophisticated cyber warfare unit and you get an opponent with growing capabilities. Needless to say, the Pentagon has some concerns dealing with the rising power base that China has. As both countries endlessly spar over and contest such territories as the Yellow Sea and Taiwan, the real battle between the superpowers has already begun and the opening salvos might just be in the interior of Canada at the oil sands. The question is how investors can benefit from the coming struggle for this valuable piece of land and the resources it holds.

No matter what anyone says, the most important commodity that exists today is oil. Some may argue that gold is better, but gold won’t fly a plane or drive a tank. Oil is the substance that makes a nation’s industrial engine move and drives the machines of war. Both Chinese and U.S. policy makers know this, so the battle is one to control as much as one can of the commodity. There is lots of oil out there, but the issue is that it is often located in unstable locations. The recent uprisings across the Middle East, namely Libya, have shown how fast oil flows can be shutoff based upon this political upheaval. One could argue that oil from South American companies like Petrobras (PBR) are a viable option, but as history has taught us, these countries will often have Socialist agendas that can also have detrimental attributes for the flow of oil. That leaves the Canadian oil sands and their vast reserves in a country that is politically stable and business friendly.

For investors, all you really need to know is that locked away in those sands are said to be over 175 billion barrels of proven oil reserves, which is second to Saudi Arabia's reserves. The question is how investors should try to capitalize on the oil sands. In the war for the oil sands, it seems the U.S. will strike first as policy makers are quickly making efforts to approve the proposed Keystone XL pipeline that would ship oil from Canada south through Mid-America to the Texas Gulf. The pipeline would be put in place by Transcananda Corporation (NYSE:TRP), but with environmentalists still fighting against the project, any investment in this company based upon the final approval would still be a gamble.

Needless to say, China has proposed a different pipeline idea. The Northern Gateway Pipeline would be built by Enbridge Inc. (ENB) and take the oil west from Alberta to the Pacific Coast to then be shipped to the Far East. While China does not have the same environmental concerns, the indigenous people of Canada do and have brought this project to a halt as well. That being the case, an investment in ENB based upon the development of this pipeline would probably not be the wisest move either.

So until it is decided which pipeline will be built, the question becomes: What investors should do to get in on the oil sands now? The answer might lie in the Syncrude organization. Syncurde is a project whose main goal is to produce crude oil and other substances from the mining and processing of the oil sands that are located on leases within the Athabasca Oil Sands Region. Syncrude has approximately 5.1 billion barrels of proven and probable reserves situated on eight leases over three contiguous sites. On the prospective side, it is thought that the total reserves are probably double the proven figure. Syncrude is not publicly traded, so for retail investors the best way to invest is via the seven companies that make up the project. Those companies are as follows:

Company Name Ticker Percent
Market Cap Current
Canadian Oil Sands Lmt OTCQX:COSWF 36.74% $11.28B $23.29
Imperical Oil IMO 25.0% $33.86B $39.95
Suncor SU 12.0% $49.23B $31.28
Sinopec SHI 9.03% $2.80B $39.03
Nexen Oil NXY 7.23% $11.13B $21.12
Mocal Energy Japan 5.0% N/A N/A
Murphy Oil MUR 5.0% $9.97B $51.54
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After examination of the seven companies, it should come as no surprise that one of them is Chinese. To keep Chinese interests involved in the region, Sinopec Shanghai Petrochemical Co. Ltd. purchased from ConocoPhillips (COP) a large stake in the Syncrude project. The value of the purchase was estimated at $4.65 billion and marked one of the largest Chinese investments ever in North America. ConocoPhillips' stake was a 9.03% interest in the Syncrude project, so assuming the project can generate 350,000 barrels a day, roughly 31,000 barrels would belong to the Chinese company. With these investments, SHI joins another Chinese oil company, PetroChina (PTR), which acquired a majority stake in the lease held by Athabasca Oil Sands Corp for $1.9 billion in 2009.
In the end, it will be interesting to see how the battle for the oil sands plays out. It is obvious to see that China has a substantial amount invested in the region in hopes of securing vast sums of oil for its own use. Needless to say, the U.S. also understands the importance of the oil and will do what it can to keep the control of the reserves tightly under Washington’s sphere of influence. What it comes down to is that no matter how hard the environmentalists wish the oil sands would just go away, the fact of the matter is that demand for oil is growing. The price for oil will grow as well and that will ramp up further production at the oil sands. The issue is how to get the oil out of Canada and into the market place. China will keep pushing for the Northern Gateway Pipeline so it can solidify itrs claims, but in the end it seems the U.S. will win this battle. U.S. policy makers understand the importance of the situation and will do what it takes to secure the Keystone XL pipeline. Critics of the plan have suggested that the Chinese will still get a good majority of the oil through the Keystone XL pipeline as the pickup point will be in the Gulf of Mexico instead of western Canadian ports. In the end, with the pipeline running right through the central part of the United States, the transportation and control of the oil sands will fall firmly in the hands of the Americans for now. That being the case, it is doubtful that the Chinese will give up that easily and the battle will continue.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.