Taking a page from the playbook of overseas investment funds, the managing arm of the Canada Pension Plan (CPP) on Tuesday made its first foray into the oilsands as a private equity investor by sinking $250-million into Calgary-based Laricina Energy.
The privately-held company, which is looking to establish its first commercial oilsands production later this year, announced that the Canada Pension Plan Investment Board (CPPIB) will acquire 17 per cent of the company ahead of an expected initial public offering (IPO) in 2011.
“The CPP investment is a very important endorsement for Laricina and we are excited CPPIB has shown confidence in Laricina’s management team and development strategy,” CEO Glen Schmidt said in a news release. “This is a strong testament to Laricina’s growth potential and continued progress toward building a leading in situ oilsands company.”
About 41 per cent of the fund’s $127.6 billion is invested in emerging or foreign markets, with just 14.5 per cent in Canadian equities, and marks the first homegrown entry into a sector that has seen increasing interest from foreign -- and especially Chinese -- investors.
Also on Tuesday, privately held MEG Energy filed an amended prospectus for an IPO that is expected to close at the end of this month. Bloomberg, quoting unnamed sources familiar with MEG’s pending IPO, said MEG is looking to raise $1.1 billion from the sale of 23 million shares at a price ranging from $42 to $48 a share, making it the second-largest IPO this year after Athabasca Oil Sands Corp. held one of the most successful IPOs in oilpatch history, raising $1.35 billion to develop a pair of projects in partnership with PetroChina.
In late 2009 PetroChina, one of the world’s largest public companies, put $1.9 billion into Athabasca to form joint ventures to develop a pair of oilsands leases. Last month, CPP equivalent China Investment Corp. (CIC), the Chinese sovereign wealth fund, made a $1.2-billion investment in Penn West Energy Trust to accelerate development of its Peace River in situ oilsands holdings.
Like Athabasca and Penn West, MEG has a significant Chinese ownership presence. The China National Offshore Oil Company (CNOOC) bought 17 per cent of the company’s shares in April of 2005 for $150 million, and placed an additional $120 million in 2007, according to the English translation of its website.
Laricina is expected to follow suit with an IPO of its own in 2011, Schmidt told the Herald in an interview last month.
The company is currently constructing the first pilot project to extract bitumen from the Grosmont carbonate, which the Energy Resources Conservation Board (ERCB) said in its annual report is the second-largest — and virtually untapped — oilsands deposit in the province with 400 billion barrels of potential resources.
But Karen Lillejord, Laricina’s vice-president of finance, said the monies gained in the deal will likely be allocated to the company’s 5,000 barrel per day Germain project, which isn’t expected to come on stream until 2012.
In an interview, she agreed that it’s unique to see a major investment by the equivalent of a Canadian sovereign wealth fund in the oilsands following the interest by foreigners, especially China.
“They’re (CPPIB) certainly got good quality capital, we’re glad that it’s Canadian. I think it’s a win for Canada too.”
Linda Sims, a CPPIB spokeswoman, said the fund owns shares of oilsands companies through its public arm but this is the first oilsands investment through its private investing division.
The CPPIB was formed in 1997 and manages the CPP as a Crown corporation with $127.6 billion under management. Like other pension funds such as Ontario Teacher’s and the Alberta Investment Management Corp., it has adopted an arm’s-length entrepreneurial investment style aimed at growing the fund to $1.55 trillion by 2050.
Although it adheres to ethical investing criteria that promote environmental, social and corporate governance standards, Sims said there was no issue on any of those fronts with the Laricina deal even though oilsands has been dubbed “dirty oil” by critics in Canada and the U.S. On its website, Laricina says its thermal technology uses less steam, energy and ultimately, fewer emissions than conventional extraction techniques.
“We do take those objectives into consideration when we do our due diligence and we’ve concluded this company is very proactive in managing these issues,” she said.
Although I'm not a big fan of oilsands - mostly because of environmental reasons - I think this is a good time to be investing in long-term energy projects. And if this company's thermal technology is environmentally "cleaner" than other technologies, then all the better.
Still, even the best technology means emissions. Interestingly, on the same day CPPIB announced this deal, Dina O'Meara of Calgary Herald reports, Prominent U.S. congressman rejects expansion of oilsands pipeline to Gulf coast:
A top U.S. politician has waded into the debate against a Canadian pipeline expansion to take crude from Alberta's oilsands to southern markets, calling the Keystone XL a "step in the wrong direction."
House Energy and Commerce committee chairman Henry Waxman called on the U.S. government to block the expansion of TransCanada Corp.'s proposed pipeline expansion to the Gulf of Mexico.
The California Democrat joins a growing list of U.S. representatives and environmentalists opposing the line which they say promotes global warming and environmental degradation by supporting oilsands operations.
The proposed $7 billion expansion would pump 510,000 barrels per day of crude from Alberta to U.S. refineries in the Gulf of Mexico. It would be completed by 2013, and forms part of TransCanada's Keystone line which began pumping to refineries in Illinois last week.
"This pipeline is a multi-billion dollar investment to expand our reliance on the dirtiest source of transportation fuel currently available," stated Waxman in a letter to the U.S. State Department. "I am concerned that the Keystone XL pipeline would be a step in the wrong direction," he said about the Obama administration's push on climate change.
Last week, 49 Democratic representatives sent a letter to Secretary of State Hillary Clinton urging her to halt the Keystone XL expansion on grounds the bitumen carried on the line represents damaged environments in northern Alberta and higher carbon dioxide emissions in North America.
In response to mounting pressure against the oilsands, Alberta Premier Ed Stelmach ran a half-page ad in the influential newspaper the Washington Post on Friday.
Stelmach outlined the importance of Canada's secure oil supply, the jobs the industry represents in the U.S. on the pipelines and refineries processing the resource, as well as technologies being used to mitigate some of the environmental impacts. He urged collaboration between the nations to develop a secure energy future.
Canada is the largest exporter of oil to the United States, followed by Mexico, Venezuela and Saudi Arabia.
Oilsands are big politics up here in Canada. Mike De Souza of Canwest News Service reports, Politicians cancel oilsands pollution probe, tear up draft reports:
The politics of oilsands are very messy. I was hoping to see more money go to developing new technologies to extract oil in a much cleaner manner. I am a firm believer in clean technology, but lots more needs to be done with oilsands.
Federal politicians from the government and opposition benches have mysteriously cancelled an 18-month investigation into oilsands pollution in water and opted to destroy draft copies of their final report, Canwest News Service has learned.
The aborted investigation comes as new questions are being raised about the Harper government's decision to exempt a primary toxic pollutant found in oilsands tailings ponds from a regulatory agenda.
The government is in the process of categorizing industry-produced substances that could either be toxic or harmful, but has excluded naphthenic acid — a toxin from oilsands operations — from the list, and left it off another list of substances that companies are required to track and report.
The exclusion is "alarming" according to a letter sent Tuesday to Environment Minister Jim Prentice and Health Minister Leona Aglukkaq, since the federal and Alberta governments have already identified it as a primary source of pollution in liquid waste dumped into ponds after companies extract oil from the region.
"Naphthenic acids are one of the main pollutants responsible for the toxicity of tarsands tailings to aquatic organisms, and have been shown to harm liver, heart and brain function in mammals," wrote Matt Price, the policy director at Environmental Defence, an independent research organization based in Toronto. "Naphthenic acids are also very long-lived, taking decades to break down."
Price also said in the letter that the federal and provincial governments are already allowing some of the toxins to leak into groundwater and surface water.
"It is therefore urgent that all tailings pollutants, and naphthenic acid in particular, be properly assessed and managed to minimize the risk to human and environmental health," he wrote.
Environment Canada said that a variety of acids from the oilsands are on a medium priorities list of its chemical-management plan, but have not yet been assessed. A spokeswoman explained in an e-mail that the government would also consider adding naphthenic acids to a list of substances that companies would be required to report following further study.
The petroleum sector is the only industry with its own stream of substances to be evaluated under the government's plan.
Meantime, Price added that the United States had moved forward with specific reporting requirements for the substance, urging the Harper government to follow suit, especially following the cancelled investigation in Parliament.
"The recent decision of the federal environment committee to abandon its work on a report regarding water and the oilsands industry heightens the need for the federal government to properly deal with oilsands pollution, or risk further undermining public trust in responsible oversight of the industry," Price wrote.
The MPs made the decision to terminate their investigation and destroy copies of their report in a meeting behind closed doors on June 17, and they have all declined to provide details on what happened apart from explaining that they failed to reach a consensus.
Liberal MP Francis Scarpaleggia, who spearheaded the parliamentary investigation on water pollution from the oilsands, blamed the government for dragging its feet on regulating the industry. He said he was working on his own report based on evidence and testimony gathered during parliamentary hearings.
"I . . . have no intention of letting go this subject that should be part and parcel of the true national water strategy Canadians demand and deserve," Scarpaleggia said. "The Conservative government has a lot of answering to do for its persistent lack of leadership on water in general and on oilsands and water in particular. The Conservative government's record on water and oilsands has been one of constant denial and foot-dragging."
Conservative MP James Bezan, who chairs the House of Commons environment committee, said he was disappointed that MPs were unable to agree on the final report, but believes the investigation has still brought important information into the public domain through the hearings and testimony from expert witnesses that have resulted in several independent reports and commentary.
"Over the next few weeks, I expect that you'll see the opposition parties and the government responding with their own considerations and recommendations on what we heard," Bezan said.
Environment Minister Jim Prentice has also recently announced that his department was investing $1.6 million in new technology to identify chemical fingerprints of toxins in the water to determine whether they are originating from specific oilsands operations.
And NDP environment critic Linda Duncan confirmed that she plans to produce her own report based on the committee's investigation. But she noted that some of the delays were caused by the government's decision to shut down Parliament at the end of last year.
"I'm very, very upset that it's dragged on this long," said Duncan. "It's absolutely shameful that the federal government is sitting on its hands."
In its investigation, MPs on the committee also travelled to hear from witnesses in Calgary, Edmonton and Fort McMurray in Alberta, but figures on their budget were not immediately available.
CPPIB's first direct foray into oilsands may yield impressive gains in the future, but the environment remains a pressing concern, especially after the BP disaster. Hopefully more companies like Laricina Energy will emerge, addressing some of the environmental concerns attached to these investments.