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The Reason Behind China's Interest in Canada's Oil Sands

The Reason Behind China's Interest in Canada's Oil Sands

Over the past two decades, Chinese oil consumption has quadrupled to nearly 10 million barrels per day. For the past decade they have been on a growth trajectory which has shown signs of slowing, but could nevertheless see them overtake the U.S. as the world’s top oil consumer by the end of the decade. As I have written before, I believe China’s economy will be the single-biggest long-term driver of oil prices over at least the next 5-10 years.
As a result, China’s presence has been felt across the globe as they aggressively make acquisitions to feed their thirst for oil. Over the past decade, Chinese spending on energy acquisitions has risen by more than an order of magnitude, rising to nearly $48 billion in 2009 and 2010.

Three companies dominate China’s oil industry: China National Offshore Oil Corp (CNOOC), Sinopec, and China National Petroleum Corporation (CNPC). In recent years these companies have made deals to develop oil fields in Iraq, signed contracts with Hugo Chavez, and they have become a major force in Ghana — where they have gone head-to-head with ExxonMobil.

China has long held ambitions with respect to North American resources. In 2005, CNOOC made a takeover bid for U.S.-based Unocal, which was the 9th largest U.S.-energy company. This news alarmed U.S. politicians who injected themselves into the discussions on the basis of national security implications. CNOOC had underestimated the political opposition, and ultimately withdrew their bid. Unocal was taken over by Chevron at a slightly lower price than that offered by CNOOC.

Having learned some valuable lessons from their Unocal experience, this past week CNOOC made a $15 billion bid to take over Canada’s Nexen. The deal would reportedly be the largest acquisition by a Chinese company, and would give China a solid foothold in North America and a more active presence in Canada’s oil sands. (China has already made investments totaling nearly $3 billion in Canada).

News of this deal has once again alarmed U.S. politicians. Democrat Senator Chuck Schumer has drafted a letter to Treasury Secretary Timothy Geithner in which he argues that the U.S. government should block the deal until China provides fair access for U.S. companies to invest in China. On the face of it that seems laughable; what jurisdiction does the U.S. have over the deal? Probably not a lot, although Nexen does own a U.S. subsidiary with offshore oil assets in the Gulf of Mexico. Congressman Markey also waded into the discussion, sending a letter to Geithner asking that any leases given to CNOOC not receive preferential treatment on royalties.

In my opinion, the deal will ultimately be approved. China has spent time fostering good relations with Canada, and Canada does not want to have the destiny of their oil industry tied primarily to U.S. political whims. I think China’s ultimate objective is to develop a strong presence in Canada’s oil sands, and get a pipeline built to the West Coast. You can bet that they are hoping that the Keystone XL pipeline expansion is not ultimately approved, as failure to expand this pipeline enhances China’s chances of becoming the destination of choice for that oil.

By. Robert Rapier

Link to Original Article: Why China is Getting their Feet Wet in the Oil Sands




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Leave a comment
  • Alex Rafferty on August 07 2012 said:
    RR is right on the button here. The USA needs a Keystone Pipeline now despite the cries from Enviros against it. Gotta understand the bigger picture and why 9/11 was engineered to happen in the first place. Who printed up the Patriot Act for Congress to sign in just 48 hours? All the oil isn't in the Middle East.

    Alex Rafferty
    Denver
  • ADS on August 07 2012 said:
    Most of Unocal's assets were not in North America, which added some of the irony to the deal being blocked by the US government. About 70% of the reserves were in Asia and Caspian sea region, according to http://knowledge.wharton.upenn.edu/article.cfm?articleid=1240

    I don't think the Chinese are as concerned about getting a physical source of oil as you suggest here. Oil is an extremely liquid, tradeable commodity - they can buy oil from Russia, the Middle East or the rest of Asia in sufficient quantities far more easily than they can guarantee completion of the Northern Gateway pipeline, which in my opinion is less likely to be built than Keystone due to first nations opposition and the lack of treaties defining what those first nations can and can't obstruct. What it does give them is significant "skin in the game" - they will have the rights to global reserves, which give them a built in hedging mechanism to defend against significant price jumps as well as a long term stake in a growing and important resource that may, one day, find its way to China in significant quantities.

    They want to try and catch up in a global oil business that they are significantly behind in compared to the US and European private companies. I'm sure they'd love Canada to start exporting oil to China, but they'd have made this deal even if that was a long shot, which it may very well be.
  • steven on August 11 2012 said:
    This article really doesn't go to the root of the said mention headline, it simply scratches the surface.
    But it does cover the do has we say not as we do aspect of U.S. foreign policy in it's last ditch attempt to show who's boss in it's pathetic fall from grace.

    The Keystone project will continue as planned, the privatization of first nation reserves all across Canada as well as the re-evaluation of localized environmental issues will inevitably pave the way for work to continue. Energy is no longer a sovereign nation issue, it has become a Global cartel issue where they set the rules of engagement and impose the nature of the outcome.

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