Awash in Oil, Canada Looks Toward China
By IAN AUSTEN
Published: October 11, 2011
Source - New York Times
OTTAWA — Ever since an oil well near Leduc, Alberta, made Canada a significant oil producer in 1947, the energy export business here has relied almost entirely on the United States.
Thanks to the massive oil sands of northern Alberta, Canada is now the United States’ top supplier of foreign oil. But that may be changing.
China’s growing energy needs and the prospect that an environmental backlash in the United States against the oil sands might hinder access to Canada’s traditional market are making the idea of a trans-Pacific market for Canadian oil increasingly attractive.
Change is about the only constant in the rapidly shifting global energy business. And one of the most significant changes is the seeming role reversal between what was once considered the periphery of energy production and consumption and what was considered the center.
That change is starkly visible in the relationship between China and Canada.
While Canada — and the United States, for that matter — have long been major energy producers, the largest role that the West has played in the global energy market has been as leading consumers.
Under the old paradigm, the nations of the Middle East were the chief producers. Institutions like the Organization of the Petroleum Exporting Countries and the International Energy Agency, over time, entrenched that dynamic.
But just as the institutions of Bretton Woods, byproducts of a U.S.-dominated postwar economic order, are being challenged, so are OPEC and the I.E.A., their relevance questioned in a new era marked by the ascendence of Brazil, China, India and Russia and the relative stagnation of the West.
If the periphery has not yet become the center of both energy production and consumption — and production is increasingly outside the grip of OPEC and the I.E.A. — then the traditional roles are at least under stress.
While the rise of China as a major market for Canada’s oil is far from assured, there are growing signs of interest from Beijing. Over the past three years, several Chinese state-owned oil companies have opened offices in the corporate hub of the Canadian energy industry — Calgary, Alberta — and have invested about $10 billion in the country’s oil industry.
“Until recently, energy was seen in continental terms. Now the bloom is off the rose of a just-continental policy,” said Paul Evans, the director of the Institute of Asian Research at the University of British Columbia in Vancouver, who grew up in an Alberta oil patch where his American-born father was in the business.
“Canadians are divided, but they generally see China as an opportunity. The concept of seeing energy in a global context rather than a continental one can be sold,” Mr. Evans said.
Many factors, particularly political ones, could ultimately upset any shift of oil exports away from the United States to China; but economics is probably not among them.
Many environmental groups in the United States are using a proposed pipeline expansion, which could bring oil sands production to U.S. refineries on the Gulf of Mexico, as a reason to impede further development of the oil sands.
Because it would cross an international border, the Keystone XL project requires presidential approval. This month, opponents of the pipeline provoked arrests outside the White House to draw attention to the issue. Lobbying efforts and protests by environmentalists have since escalated.
A study done as part of a U.S. Department of Energy review concluded that it would be less expensive to send crude from the oil sands to Canada’s Pacific coast by pipeline, and from there to Asia by tanker, than it is to move it entirely by pipeline to the Gulf Coast.
The catch is that the current pipeline to Canada’s west coast, which sends a small portion of the oil sands’ production to Asia, is already operating near capacity. Its owner, Kinder Morgan, has expansion plans.
And in January, Canadian regulators will begin reviewing plans by Enbridge, a major Canadian pipeline operator, to build a second line to the coast. An early investor in the project, which is worth 6.6 billion Canadian dollars, or about $6.35 billion, is China Petroleum & Chemical, also known as Sinopec.
Wenran Jiang, a political scientist at the University of Alberta who focuses on energy issues, said that for the operators of oil sands projects, China had great appeal. Because relatively few refineries in the United States can process the heavy oil from the oil sands, it currently trades at a discount.
“We sell so much cheaper than the global average oil price simply because we have no other option,” he said. “It’s always better to have more customers than just one.”
The attraction is less obvious, however, for members of aboriginal communities with land claims along the routes of the two pipelines. And the prospect of increased oil tanker traffic along the coast of British Columbia, one of Canada’s scenic wonders, is likely to rouse considerable political opposition in that province.
Also coming into play are Canada’s foreign ownership laws. In 2004, China Minmetals, a state-owned company, backed away from a takeover of Noranda, then Canada’s largest mining company, after a backlash from the public and politicians.
More recently, the Conservative government used the foreign ownership laws to turn down a bid from BHP Billiton of Australia for Potash Corp. of Saskatchewan.
Although Potash has a much lower public profile than the oil sands in Canada, the prospect of its coming under foreign control proved widely unpopular.
Gregory L. Stringham, the vice president of markets and oil sands for the Canadian Association of Petroleum Producers, said that the energy industry did not expect the government to repeat that action if a foreign buyer, even from China, moved to take control of any oil sands project.
Mr. Stringham said that the government had told the oil industry that it was unlikely to block any foreign takeovers because, unlike in mining, there are a large number of companies active in the energy sector.
Indeed, after initially snubbing China over human rights issues, the current Conservative government, which came to power in 2006, has been actively seeking foreign investment in the energy sector from investors in China and elsewhere in Asia.
“In the last three or four years, we’ve seen a strong influx of investment and interest,” Mr. Stringham said, referring to Asian investors. “They see Canada as a very reliable, secure supplier of energy.”
Mr. Evans, the professor from British Columbia, does not share the industry’s optimism about the reception that would greet China if it tried to control even a portion of the oil sands, which loom large both politically and economically in Canada.
“This can be the kind of issue that can explode,” he said. “Surveys underscore how nervous Canadians are about state-owned enterprises from China.”
Both he and Mr. Jiang, the political scientist, cautioned that any substantial political backlash in Canada was likely to reduce China’s enthusiasm for the oil sands.
Environmentalists, not surprisingly, also oppose Chinese investment that would create further expansion of oil sands development.
Extracting the gooey sands and separating the oil from them consumes a significant amount of energy, making the projects a growing source of greenhouse gases. Waste from the sands has also created huge lakes of toxic waste in Alberta.
But Nathan Lemphers, a senior policy analyst with the Pembina Institute, an environmental group in Calgary, warned of quite different risks. He said that the oil sands might ultimately prove to be more of a disappointment to China and Canada than a bonanza.
China’s investments in alternative forms of energy, as well as railways and mass transit, he said, could significantly diminish its thirst for oil, even as its economic development increases.
“There are many industry boosters and politicians in western Canada who would like to see the oil sands market diversified,” Mr. Lemphers said. “The extent to which oil sands are a part of China’s future energy mix is an open question.”
A version of this special report appeared in print on October 12, 2011, in The International Herald Tribune with the headline: Awash in Oil, Canada Looks Toward China.
By IAN AUSTEN
Published: October 11, 2011
Source - New York Times
OTTAWA — Ever since an oil well near Leduc, Alberta, made Canada a significant oil producer in 1947, the energy export business here has relied almost entirely on the United States.
Thanks to the massive oil sands of northern Alberta, Canada is now the United States’ top supplier of foreign oil. But that may be changing.
China’s growing energy needs and the prospect that an environmental backlash in the United States against the oil sands might hinder access to Canada’s traditional market are making the idea of a trans-Pacific market for Canadian oil increasingly attractive.
Change is about the only constant in the rapidly shifting global energy business. And one of the most significant changes is the seeming role reversal between what was once considered the periphery of energy production and consumption and what was considered the center.
That change is starkly visible in the relationship between China and Canada.
While Canada — and the United States, for that matter — have long been major energy producers, the largest role that the West has played in the global energy market has been as leading consumers.
Under the old paradigm, the nations of the Middle East were the chief producers. Institutions like the Organization of the Petroleum Exporting Countries and the International Energy Agency, over time, entrenched that dynamic.
But just as the institutions of Bretton Woods, byproducts of a U.S.-dominated postwar economic order, are being challenged, so are OPEC and the I.E.A., their relevance questioned in a new era marked by the ascendence of Brazil, China, India and Russia and the relative stagnation of the West.
If the periphery has not yet become the center of both energy production and consumption — and production is increasingly outside the grip of OPEC and the I.E.A. — then the traditional roles are at least under stress.
While the rise of China as a major market for Canada’s oil is far from assured, there are growing signs of interest from Beijing. Over the past three years, several Chinese state-owned oil companies have opened offices in the corporate hub of the Canadian energy industry — Calgary, Alberta — and have invested about $10 billion in the country’s oil industry.
“Until recently, energy was seen in continental terms. Now the bloom is off the rose of a just-continental policy,” said Paul Evans, the director of the Institute of Asian Research at the University of British Columbia in Vancouver, who grew up in an Alberta oil patch where his American-born father was in the business.
“Canadians are divided, but they generally see China as an opportunity. The concept of seeing energy in a global context rather than a continental one can be sold,” Mr. Evans said.
Many factors, particularly political ones, could ultimately upset any shift of oil exports away from the United States to China; but economics is probably not among them.
Many environmental groups in the United States are using a proposed pipeline expansion, which could bring oil sands production to U.S. refineries on the Gulf of Mexico, as a reason to impede further development of the oil sands.
Because it would cross an international border, the Keystone XL project requires presidential approval. This month, opponents of the pipeline provoked arrests outside the White House to draw attention to the issue. Lobbying efforts and protests by environmentalists have since escalated.
A study done as part of a U.S. Department of Energy review concluded that it would be less expensive to send crude from the oil sands to Canada’s Pacific coast by pipeline, and from there to Asia by tanker, than it is to move it entirely by pipeline to the Gulf Coast.
The catch is that the current pipeline to Canada’s west coast, which sends a small portion of the oil sands’ production to Asia, is already operating near capacity. Its owner, Kinder Morgan, has expansion plans.
And in January, Canadian regulators will begin reviewing plans by Enbridge, a major Canadian pipeline operator, to build a second line to the coast. An early investor in the project, which is worth 6.6 billion Canadian dollars, or about $6.35 billion, is China Petroleum & Chemical, also known as Sinopec.
Wenran Jiang, a political scientist at the University of Alberta who focuses on energy issues, said that for the operators of oil sands projects, China had great appeal. Because relatively few refineries in the United States can process the heavy oil from the oil sands, it currently trades at a discount.
“We sell so much cheaper than the global average oil price simply because we have no other option,” he said. “It’s always better to have more customers than just one.”
The attraction is less obvious, however, for members of aboriginal communities with land claims along the routes of the two pipelines. And the prospect of increased oil tanker traffic along the coast of British Columbia, one of Canada’s scenic wonders, is likely to rouse considerable political opposition in that province.
Also coming into play are Canada’s foreign ownership laws. In 2004, China Minmetals, a state-owned company, backed away from a takeover of Noranda, then Canada’s largest mining company, after a backlash from the public and politicians.
More recently, the Conservative government used the foreign ownership laws to turn down a bid from BHP Billiton of Australia for Potash Corp. of Saskatchewan.
Although Potash has a much lower public profile than the oil sands in Canada, the prospect of its coming under foreign control proved widely unpopular.
Gregory L. Stringham, the vice president of markets and oil sands for the Canadian Association of Petroleum Producers, said that the energy industry did not expect the government to repeat that action if a foreign buyer, even from China, moved to take control of any oil sands project.
Mr. Stringham said that the government had told the oil industry that it was unlikely to block any foreign takeovers because, unlike in mining, there are a large number of companies active in the energy sector.
Indeed, after initially snubbing China over human rights issues, the current Conservative government, which came to power in 2006, has been actively seeking foreign investment in the energy sector from investors in China and elsewhere in Asia.
“In the last three or four years, we’ve seen a strong influx of investment and interest,” Mr. Stringham said, referring to Asian investors. “They see Canada as a very reliable, secure supplier of energy.”
Mr. Evans, the professor from British Columbia, does not share the industry’s optimism about the reception that would greet China if it tried to control even a portion of the oil sands, which loom large both politically and economically in Canada.
“This can be the kind of issue that can explode,” he said. “Surveys underscore how nervous Canadians are about state-owned enterprises from China.”
Both he and Mr. Jiang, the political scientist, cautioned that any substantial political backlash in Canada was likely to reduce China’s enthusiasm for the oil sands.
Environmentalists, not surprisingly, also oppose Chinese investment that would create further expansion of oil sands development.
Extracting the gooey sands and separating the oil from them consumes a significant amount of energy, making the projects a growing source of greenhouse gases. Waste from the sands has also created huge lakes of toxic waste in Alberta.
But Nathan Lemphers, a senior policy analyst with the Pembina Institute, an environmental group in Calgary, warned of quite different risks. He said that the oil sands might ultimately prove to be more of a disappointment to China and Canada than a bonanza.
China’s investments in alternative forms of energy, as well as railways and mass transit, he said, could significantly diminish its thirst for oil, even as its economic development increases.
“There are many industry boosters and politicians in western Canada who would like to see the oil sands market diversified,” Mr. Lemphers said. “The extent to which oil sands are a part of China’s future energy mix is an open question.”
A version of this special report appeared in print on October 12, 2011, in The International Herald Tribune with the headline: Awash in Oil, Canada Looks Toward China.