China's cash floods into Canadian energy sector
By Wenran Jiang
As China has become the world's second-largest economy, its demand for energy
has caused it to become the world's biggest comprehensive energy consumer.
Accompanying this process has been a sharp upward trend in Chinese foreign
direct investment (FDI) focused on energy and other resources.
Canada has become the latest addition to Beijing's FDI investment priority list
with C$15 billion (US$15.2 billion) worth of Chinese capital pouring into the
energy-rich province of Alberta in 2010. [1]
These fast-paced investment activities have occurred against the backdrop of a
sustained high energy demand forecast from China in the coming years and
sluggish prospects for economic recovery in the United States. Additionally,
there has been
intensified protest from environmental groups against the import of Canadian
oil sands products to the United States, for example, against the controversial
Keystone XL crude oil pipeline from Alberta to the southern United States.
A closer look at the China's leap into the Canadian energy sector, however, may
reveal some surprising characteristics that are not associated with
conventional assessments of China's much talked-about ''Go Out'' strategy.
China's renewed interest in investing in Canada
Since the end of 2009, China National Petroleum Corporation (CNPC), China
Petroleum & Chemical Corporation (Sinopec) and China National Offshore Oil
Corporation (CNOOC) all have made substantial investments in the Canadian
energy sector with a particular focus on the Alberta oil sands development. The
China Investment Corporation - a $300 billion sovereign wealth fund - opened
its first overseas office in Canada early this year and chose Canada for its
only energy sector equity investment.
The proposed PetroChina-EnCana shale gas deal in British Columbia, worth $5.4
billion has failed to materialize. Therefore, so far the largest single Chinese
investment in the Canadian energy sector is the $4.65 billion takeover of
ConocoPhillips' shares by Sinopec in Syncrude Canada Ltd. The Syncrude Group is
Canada's largest oil sands production consortium with most of its production
exporting to the US market.
The Sinopec-Syncrude deal was followed closely by the successful purchase of
60% of Athabasca Oil Sands Corporation's MacKay and Dover oil sands projects by
PetroChina (a CNPC subsidiary) worth $1.9 billion. China also has invested in
Canada's mining sector since 2009 - notably the $1.7 billion equity investment
by the China Investment Corporation in Teck Resources, a Vancouver-based
company with both energy and mining assets in North America. In its latest
move, CNOOC, the third-largest Chinese national oil company (NOC), acquired the
struggling oil sands producer Opti Canada Inc, buying a 35% stake in the joint
Nexen-Opti oil sands project in Long Lake, Alberta.
A number of factors have contributed to China's renewed interest in Canadian
investments.
First, the recent Chinese re-entry into Canada is more than a reflection of
basic market movements. Chinese energy and resource needs have been driving
China's foreign investment in these areas over recent years. A
better-than-expected recovery from the recession in China also has fueled
demand energy and resources. Such demand however did not translate into a
steady inflow of Chinese investment in Canada's energy sector, as in other
resource rich countries.
In 2005, the three top Chinese national oil companies made investments in
Canada, including a $2 billion memorandum of understanding between PetroChina
and Enbridge to support building the Gateway pipeline system from Edmonton,
Alberta, to Kitimat, British Columbia. [2] This momentum, however, did not
continue. During the pre-crisis boom years from late 2005 to early 2009,
Chinese firms made almost no major investment in Canada's energy sector.
In fact, the absence of major Chinese investment coincided with a very low
point in Sino-Canadian diplomatic and political relations. Under the
Conservative government of Prime Minister Stephen Harper, China was not on
Canada's foreign policy priority list. Prime Minister Harper did not pursue a
visit to China during his first three years in office, resulting in the
suspension of bilateral summit diplomacy. [3] Since early 2009, the Canadian
government has changed course in its China policy. Ottawa dispatched key
cabinet ministers to Beijing, reassuring the Chinese that Canada values its
relations with China and that Chinese investments are welcome. Such consistent
and conciliatory messages culminated in a December 2009 visit when Harper
visited China. This attitude shift and improved political relations were
important precursors to China's renewed investment activities in Canada's
energy and resources sectors.
Global oil prices represent another reason why Chinese interest in Canadian
energy has recently increased. After a brief plunge to the low $30 per barrel
range during the economic crisis, oil prices quickly climbed back and
stabilized at the $80-90 range. Various forecasts place future oil prices from
$80 to $100 per barrel - a level that would sustain profitability for Alberta's
oil sands extraction.
One major question Chinese oil companies have asked is whether the global
market would be able to support an oil price range high enough to justify
long-term investment in Alberta's oil sands. The current oil prices seem to
have removed initial doubts and Sinopec's generous payment for the
ConocoPhillips shares in the Syncrude deal displayed a considerable new
confidence from the Chinese side.
Chinese state banks also have provided large, state-owned energy and resource
companies with loans and overseas expansion credits. Many cash-strapped
Canadian energy and resource firms welcome such financial strength and secure
funding. At the same time, the North American stock market was hit hard during
the economic crisis and many energy and resource companies have become very
good investments - an opportunity that has not gone unnoticed by Chinese NOCs.
Even though the market has recovered significantly, the Chinese are optimistic
that the timing is still good and their investments will yield further returns
when the world economy finally climbs out of recession.
Implications for North America
Although top Chinese companies have leaped into Canada with fast pace, the
total amount of investment is relatively small if measured against these
companies' overall global investment. In the past two years, China's top energy
firms have arranged various forms of loans in exchange for oil supply contracts
with Russia ($25 billion), Kazakhstan ($10 billion), Brazil ($10 billion) and
Venezuela ($20 billion). Chinese oil companies have become involved in joint
ventures in Iraq and Australia. The Chinese presence is also a relatively
recent phenomenon, as foreign FDI, primarily from the United States, had poured
in some C$125 billion by 2009.
The Sinopec-Syncrude deal announcement spurred talk about potential Chinese
leverage over Canada's resources. Some have repeated charges that Chinese
investment will lead to Chinese control of Canada's natural endowments - an
accusation that lacks credible evidence or research backing.
Others warn that any Chinese voice in the development of Alberta's oil sands
would be counterproductive to Canada's national interests. Nonetheless, if the
smooth approval of recent Chinese investments by the government of Canada is
any indication, future Chinese capital inflow into Canada may not face
substantial questioning or barriers.
Still, renewed Chinese investment in the Canadian energy sector raises some
questions that need to be addressed.
First, does China insist on shipping its overseas oil production back home?
This is clearly not the case for Sinopec's deal with Syncrude. There is no
known clause in the transaction that states certain portions of production will
be shipped to China. In fact, Sinopec may have made the investment on two
assumptions. The first is that exporting oil to China will be possible only on
a small scale in the foreseeable future, given the existing modest pipeline
infrastructure on the west coast. The potential for large-scale supply exists
only if Enbridge's Gateway pipeline gets the regulatory approval required for
its construction.
The second assumption may represent a shift in Chinese thinking - China's
companies are now willing to invest in Canada's energy sector even without
large-scale access to Canadian oil production for China's domestic use.
Contrary to popular assumption, much of China's global oil production is not
shipped to China, but is sold on the world market, like oil produced by Western
oil companies. At the moment, Syncrude production will continue to flow south
to the United States and Sinopec's 9% ownership will not change this
arrangement.
Second, is a pipeline that ships oil from Alberta to the Canadian west coast
still desirable for the Chinese and Canadians? Currently, there is no
large-capacity, direct pipeline from Alberta to the west coast. Kinder Morgan,
however, completed its TMX Loop project in 2008, linking pipelines from Alberta
to the existing Mountain pipeline, which reaches a port in southern Vancouver.
The TMX Loop has a shipping capacity of 300,000 barrels per day (bpd). If
construction of Enbridge's Gateway pipeline goes ahead as planned, it would
have an additional 550,000 bpd capacity, but it will not be functional for
several years.
Recently, the Chinese have inquired about the state of the Gateway pipeline
project and have continued to express strong interest. Such interest is
understandable: this pipeline would certainly increase China's incentive to
further invest in Alberta's oil sands. Also, an additional pipeline or two is
beneficial for Canada as this would diversify its international markets.
Canada currently sells crude oil to the United States at $20 below the global
market price. None of the planned diversification projects, however, would
fundamentally change the fact that Canada is overwhelmingly dependent on the US
market. Regardless, it is almost certain that if there are increased means of
transporting Alberta's oil to the west coast, Chinese and other Asian
investment will increase.
Third, is it in Canada's interest for Chinese and other Asian investors to
build refineries in Alberta? Most of Alberta's pipelines run south, shipping
bitumen to US refineries for value-added upgrading. It has been long known from
both sides of the border that this is the nature of a North American integrated
market. It is also true that Alberta's government has promoted a development
strategy that will see investment being made to build refineries around
Edmonton, thus taking advantage of the booming energy market in creating
value-added jobs in Canada.
If Chinese and other Asian economies become involved in Alberta oil sands
extraction, there is good reason to consider investing in refineries as part of
a long term strategy - especially under the condition that upgraded product oil
may one day be shipped via improved pipeline and rail capacities to the west
coast and then on tankers.
Fourth, should Canada pursue Chinese investment as a part of its
diversification strategy away from the US market and, if yes, should Canada
worry about the potential for Sino-US competition for Canadian oil? The
question begs a response from Canada as much as from China and the United
States.
For Canada, the answer seems to be more of a market-oriented one than a
strategic one. When US demand was high, there was very little discussion
concerning diversification among Canadian producers. Alberta was content to
ship most of its exports to the south. The recent US economic downturn and talk
of labeling oil sands production as "dirty oil" has concerned Canadian
producers. Consequently, there has been a renewed Canadian interest in market
diversification.
Chinese investment came at the correct time and this investment has been
welcomed by Canadian producers. There is also an indication that the United
States and China are moving toward treating each other as partners rather than
as competitors in seeking energy cooperation, as seen by US Secretary of Energy
Steven Chu's approach of active engagement in this area. This places Canada in
an advantageous rather than antagonistic position.
Finally, where is the red line for Chinese investment in Canada's energy
sector? In the global context, Chinese oil companies certainly possess the
financial wherewithal to invest and have done so on a large scale - up to $40
billion in some countries. In the past few years, Canada has become more
confident in believing that the country has the necessary regulatory framework
in place to cope with increased Chinese investment. The current Canadian
national discourse is more focused on whether investment from China will
provide social and economic benefit to Canada and on the environmental impact
of pipelines running to the west coast and prolonged large scale extraction of
oil sands.
Facts run against the assumptions of those who perceive China's "Go Out"
strategy as a predatory behavior, or those who are concerned that Chinese
presence in Canada's energy sector may deprive the United States of its
supplies. The dragon has returned to Canada, but cautiously. Beijing has been
sensitive to the political, economic, social and environmental conditions of
its investment in Canada, settling for minority positions in their equity and
joint venture agreements. Most importantly, at present, crude produced by
Chinese capital in Canada is only flowing south to the US market, helping to
the secure US energy supply.
Notes
1. Alberta Minister of Energy Ron Liepert, Lunch Keynote Speech at the
Canada-Asia Energy Cooperation Conference and the 7th Canada-China Energy &
Environment Forum, Calgary, September 8, 2011.
2. For an earlier assessment of Canada-China energy relations, see Wenran
Jiang, "Fueling
the Dragon, China's Quest for Energy Security and Canada's Opportunities,
Asia Pacific Foundation of Canada.
3. For a more detailed analysis on Canada-China relations under the Harper
government, see Wenran Jiang, "Seeking a Strategic Vision for Canada-China
Relations", The International Journal, Vol. 64, No. 4, Fall 2009.
Wenran Jiang, PhD, is the Mactaggart Research Chair of the China
Institute at the University of Alberta and a Senior Fellow at the Asia Pacific
Foundation of Canada.
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