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China's oil sands push

PetroChina has staked China's claim to Canada's oil sands, providing local developers with an export alternative to the US market, writes Derek Brower

"THREAT to the new energy economy," reads the strapline on literature from the Dirty Oil Network, a coalition of environmental groups opposed to Canada's oil sands and the US' use of them.

China does not agree. At the end of August, one of its state-controlled companies, PetroChina, bought a 60% stake in two new oil-sands projects, paying Athabasca Oil Sands (AOSC) C$1.9bn ($1.7bn) for control of the MacKay River and Dover developments.

The two AOSC properties could eventually produce around 0.5m barrels a day (b/d), based on 5bn barrels of reserves. AOSC has not set a schedule for development of the oil. Previously, the company was planning to export its bitumen to refineries in the US Midwest, where demand for Canadian heavy crude is expected to reach 2m b/d by 2015. The company says it would consider other export routes, too.

Provided the Canadian and Alberta governments approve the deal, the destination of the crude will be PetroChina's decision. Crucially, the Chinese company has backed a new pipeline to the west coast of Canada, which would open up a route for exports to its home market. Enbridge, the company that hopes to develop that 0.525m b/d line, could start building it next year. PetroChina has an agreement with Enbridge to take up to 50% of the capacity.

The AOSC deal makes sense for China, whose oil-sands presence had been notable for its restraint, especially in the recent boom years while other companies were rushing to invest. PetroChina's stake in AOSC will dwarf the positions held in the oil sands by two other Chinese state-controlled firms. CNOOC has a minority holding in a smaller project and Sinopec bought 10% of Total's Northern Lights development earlier this year.

Li Ka-Shing, a Chinese businessman, also owns a majority stake in Husky Energy, another oil-sands player. But Husky, which also has a downstream presence in Canada, is still considered a local firm.

It could also herald another round of acquisitions from China's state-owned energy companies. Last month, China National Petroleum Corporation, PetroChina's parent company, received a five-year discounted loan from the China Development Bank to help it buy more upstream assets overseas. That might include another offer for YPF, the Argentine unit of Spain's Repsol, or part of it. CNPC failed to buy control of the company after offering almost $15bn for it earlier in the summer. It could also lead to further acquisitions in Alberta.

Strategic rewards

Strategically, the PetroChina deal looks rewarding for China and Canada. The US has long enjoyed a monopoly on Canadian oil exports and its control over the oil sands has annoyed many developers. Opening up a new export route to Asia – assuming this results from the PetroChina deal – would be welcome to some in the sector. Tom Katinas, chief executive of Syncrude, one of the largest oil-sands developers, told a conference last month that he would "love" to see infrastructure to the west coast brought on stream, "to be able to export some of the Alberta oil".

Others in Alberta are less sure. An editorial in the Calgary Herald, a staunch supporter of the oil sands, called on the federal government to block the deal. Citing China's human-rights record, its totalitarian regime and its aggressive pursuit of assets elsewhere, the newspaper suggested that if Canada accepted the deal, it would be hard-pressed to justify blocking any bigger purchases later.

Yet, so far, the indications are that the federal government will not interfere. Prime minister Stephen Harper said the government would "apply the law that's in place". That includes a review of any foreign acquisition of Canadian assets worth more than C$312m. He added, however, that his government had been "very clear that in the middle of a global recession we will not be introducing further barriers to foreign investment".

The Alberta government, a long-standing adherent to the principles of laissez-faire economics, is also inclined to accept PetroChina's acquisition. Its premier, Ed Stelmach, claimed it "shows that we are going to be game-changers in oil resources around the world". If PetroChina's bid triggers more Chinese interest, this would also inject momentum into the oil sands. Since the collapse in crude prices last year, about $100bn worth of projects have been shelved or scrapped.

The US, meanwhile, has watched the deal's progress with a degree of alarm, to judge by some comments from Congress. Yet for Canada, PetroChina's interests could not have come at a better time. New proposals in Congress aimed at curbing greenhouse-gas emissions have worried Canadian oil producers. Last month, Harper met President Barack Obama and reiterated his opposition to some of the new legislation, saying a plan to erect tariffs against countries that did not reduce emissions would "become a front for protectionism quicker than you can say 'hello'".

Meanwhile, environmental groups such as the Dirty Oil Network (which lists Greenpeace, the Sierra Club, Friends of the Earth and various other pressure groups as members) are hoping to reverse a decision by the State Department to allow construction of a new pipeline to supply bitumen from the oil sands to the Midwest. Enbridge's C$1.2bn Clipper project would export 450,000 b/d to Wisconsin and be on stream by 2010. In August, the secretary of state, Hillary Clinton, approved the project despite the vociferous campaign against it.

Alberta's executives resent the sway they believe such campaigners now hold in the US, and consider that the Obama administration is much less enthusiastic about the oil sands than was the Bush White House. Samuel Bodman, the Republican energy secretary under George Bush, was a frequent visitor to the oil sands, emphasising their strategic importance to the US. Since then, several US states have begun legislating against Canada's "dirty oil", despite a recent study showing that fuel produced from the oil sands is scarcely more carbon-intensive than fuel from other crudes.

In Alberta, the Enbridge decision was welcomed as a signal that the US has not forgotten its long-standing ally. But China's entry into the oil sands will remind the US that Canada has options. Even if PetroChina's investment remains financial – and none of AOSC's bitumen ever ends up in Asia – China will now control some of the Canadian crude refined in the Midwest's refineries.

That could be galling for the US, which resisted CNOOC's bid to buy Unocal in 2005 because it would be against the country's strategic interests. A controversial provision in the North American Free Trade Agreement guarantees the US a proportion of Canadian oil exports. But if PetroChina's arrival heralds sustained Chinese interest in the oil sands, the US might remember the value of Alberta's "dirty oil".

 

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