[R-G] China's Growing Pipeline into Canada

[Anthony Fenton]

China's Growing Pipeline into Canada
Cindy Hurst	August 11th 2008
Cutting Edge Energy Contributor
http://www.thecuttingedgenews.com/index.php?article=697&pageid=21&pagename=Energy

China’s relentless quest for energy has brought it to the U.S.  
neighboring country of Canada.

Fifteen years ago, China did not import any oil at all. Today,  
however, the Asian country is the world’s second largest consumer of  
oil. In 2004, oil imports to China are said to have increased by 37 %,  
which contributed to soaring oil prices around the world.

In 2007, China consumed an average of 7.5 million barrels per day  
(mbd) of oil. That amount is projected to increase to approximately  
13.6 mbd by 2025. That same year, China’s production level is expected  
to be approximately 3.7 mbd, which will require the country to have a  
net import of at least 9.9 mbd.

The significance of China extending its pursuit of oil into Canada is  
that Canada has been the number one source of U.S. oil imports for the  
past decade. According to figures released by the Energy Information  
Administration, in 2006 Canada produced an average of 3.288 mbd of  
oil. Of this, an average of just over 2.353 mbd, or 72 % of the oil  
produced, has been exported to the U.S.

Within the past three years, in an effort to increase its own energy  
security, China has begun flexing its muscles to strike various deals  
with Canada to win access to some of the most prized oil reserves in  
North America. In April 2005, China National Offshore Oil Corporation  
(CNOOC), through its wholly owned subsidiary CNOOC Belgium BVBA,  
signed an agreement with MEG Energy Corp., a Canada-based company, to  
buy 16.67% of MEG for $135 million. MEG has the rights to an oil sands  
lease in a 52-section (32,900 acres) oil sands block that is believed  
to contain 2 billion barrels of recoverable oil. This acquisition is  
expected to help pave the way for further investment into Canada’s  
huge oil sands resources. In another deal, Sinopec has acquired 40 %  
of the Northern Lights Oil Sands Project in Alberta, where production  
is expected to begin sometime in 2010. Then, last year China National  
Petroleum Corporation (CNPC) won exploration rights for a 260-acre  
tract in Alberta.

China has also been concentrating on creating export routes from  
Canada. In another business transaction, PetroChina Co. Ltd. and  
Enbridge Inc., Canada’s number two pipeline company, signed a  
memorandum of understanding to cooperate on the development of the  
Gateway pipeline which is expected to transport approximately 400,000  
bpd of oil produced from the Alberta oil sands from Edmonton to a port  
on the west coast of British Columbia, where it can then be shipped  
via tanker to China as well as other Asia-Pacific markets and  
California. China will possibly sign up for as much as half of the  
pipeline’s capacity of (200,000 bpd), while Enbridge will broker the  
supply deals between PetroChina and oil sands producers.

In 2003, the U.S. bought over 50% of Canada’s oil production, which  
equates to 1.5 mbd or 553,000,000 barrels for the year. That same year  
China imported a mere 376,000 barrels the entire year, most likely in  
one or two small shipments during the winter.

Although China’s involvement may seem insignificant thus far, further  
encroachment into neighboring Canada’s oil supply could potentially  
cause uneasiness between Canada and the U.S., which have shared a  
smooth energy relationship since the 1970s. Historically almost all of  
Canada’s exported oil had been sent via a pipeline heading south. Now  
China is busy striking up deals with Canadian companies that could  
ultimately cause it to begin gaining market share. Like any  
capitalistic business, Canadian firms would not likely reject offers  
made by the Chinese simply to protect U.S. imports.

Additionally, Canada is capitalizing on China’s growth in other areas  
as well. For example, economic growth in the U.S. has been slowing. As  
a result of this slowing, the U.S. is not importing as much from  
Canada. This would have a negative impact on the Canadian economy if  
it weren’t for China offsetting this with its purchases of metallic  
minerals, machinery and electrical equipment exports. While exports to  
the U.S., which account for 64 % of Canada’s exports, drop in areas  
such as the forestry sector, China is picking up the slack in other  
areas. In April 2005, the Canadian government released its  
International Policy Statement which stated, “Internationally, we will  
secure and enhance Canada’s place in the U.S. market, anchoring our  
position in a globally competitive North American economy, and further  
develop our trade and investment links with new economic powerhouses  
such as China, India and Brazil.”

With a newfound interest in expanding its economic reach to further  
its exports, coupled with the slowing economies of the U.S. and Japan,  
Canada could easily feel justified in increasing its oil supplies to  
China. Should China become aggressive enough, it would be plausible to  
cause the U.S. to lose part of its market share. This is not likely to  
happen any time soon, however. There are a number of hurdles China  
first needs to overcome. Long-term contracts to sell oil to the  
Chinese need to be signed. Supply deals with other potential shippers  
need to be signed. Canada must figure out which port will best support  
supertankers. Canada currently prohibits oil-tanker traffic along most  
of its Western Coast, which could pose a problem to China. Finally,  
Chinese refineries are better suited for handling Middle-Eastern crude  
than Canadian crude. If China hopes to diversify its oil sources, this  
will have to change.


Cindy Hurst is a political-military research analyst with the Foreign  
Military Studies Office. She is also a Lieutenant Commander in the  
United States Navy Reserve. This article was adapted from a report for  
the Institute for the Analysis of Global Security www.iags.org. The  
views expressed in this report are those of the author and do not  
necessarily represent the official policy or position of the  
Department of the Army, Department of Defense, or the U.S. Government.