Oil sands exports to China depend on more than pipelines
Graduating from spot trades requires a strong government hand
It will take more than a new spigot on Canada’s West Coast for Alberta oil producers to win significant market share in the Far East, Calgary executives are being told. China is not waiting with baited breath for tanker-loads of Alberta bitumen to wash up on its shores. “They have other options,” Reynold Tetzlaff, national energy leader with PricewaterhouseCoopers LLP, told a Calgary crowd this spring.
Officials in Beijing are exercising such choice with aplomb. In April, state-run China National Petroleum Corp. (CNPC) said it would begin construction on a $9.08-billion refinery in Guangdong province on China’s southeast coast. By 2014, the plant will process up to 400,000 barrels of heavy crude per day, putting it in a league with some of North America’s largest refining complexes. The facility won’t be fed by Canadian oil, however. Instead, CNPC has enlisted Petroleos de Venezuela SA as a partner, following years of debt-for-oil exchanges between Beijing and Caracas.
Chinese officials have also signaled that they are prepared to bankroll a pipeline to bring Colombian heavy crude to tidewater for eventual export by tanker, says Erica Downs, a fellow at the Brookings Institution’s John L. Thornton China Center in Washington, D.C. “I expect we will see some of that oil going to China as well,” she says. “I think they are interested in having more heavy oils in their crude mix.”
The interest, ostensibly good news for Alberta producers facing volatile price differentials in the American Midwest, belies a prickly truth about doing business with Beijing in particular, and the Far East in general, China watchers say. As Alberta pivots away from North America in search of new markets, there is a growing appreciation that the Canadian government, abetted by its provincial counterparts in the West, must play a major role in facilitating energy-based trade.
“That’s exactly what we’re lacking,” says Wenran Jiang, project director of the Canada-China Energy and Environment Forum and a senior advisor on Asia to Alberta’s Department of Energy. “We have to realize that the state does play a bigger role in Asian countries and we need to co-ordinate in that regard.”
Canada is already lagging rivals, according to a winter blueprint detailing how Alberta might become more than simply a spot supplier of crude oil to the Chinese market.
A February visit to Beijing by Prime Minister Stephen Harper that produced a long-awaited Canada-China Foreign Investment Promotion and Protection Agreement, as well as the signing of a Declaration of Intent to bolster Sino-Canadian trade, added to a long list of memorandums and agreements that died of neglect, suggests Building A Long Term Energy Relationship Between Alberta and China, a December 2011 report compiled by the University of Alberta’s China Institute on behalf of Alberta Energy.
“Canada appears to have the reputation, fair or unfair, in China of not following through,” it states.
China and Russia, by contrast, have shared a managed trade relationship since the 1990s. Australia established a so-called “dialogue mechanism for resource co-operation” with Beijing in 2000. That agreement has paved the way for exports of liquefied natural gas (LNG) and coal from Australia’s northwest coast, partly in exchange for China’s foreign direct investment.
“We’re looking at 20 to 30 years or more of supply agreements, of stable relationships, normally based on a negotiated market price for X amount of oil or gas supplied by a given country to China in return for China’s long-term investment,” Jiang says.
Canada could replace such exchanges with a “stable agreement that satisfies our need for security of demand,” Jiang adds. That would, among other things, give China the assurance it needs to build coking capacity required to process heavier grades of crude oil – something the country currently has “limited” capacity for under existing refining configurations, according to Jackie Forrest, a senior director at consultancy IHS-CERA.
But appearances can be deceiving, says Steve Wuori, president of liquids pipelines at Enbridge Inc. There’s a “tremendous” amount of flexibility in Asian markets beyond just China, he said on the sidelines of a spring energy conference in Calgary.
Nor is the company’s hotly contested Northern Gateway pipeline to Canada’s West Coast restricted to shipping diluted bitumen, he points out. The project is designed to carry 525,000 barrels of oil sands-derived crude every day for export from a new marine terminal at Kitimat, British Columbia.
Nearly half of the initial volumes would consist of refinery-ready synthetic crude oil, according to the project’s telephone book-sized construction application to the National Energy Board. Enbridge expects that proportion would necessarily change as forecast oil sands production outstrips domestic upgrading capacity, giving Chinese companies – as well as those in neighboring markets – a grace period to changeover existing refineries to handle a heavier, sour product.
“One of the things that we’re aware of is that the Chinese, for example, can actually permit and construct coking capacity very rapidly compared to how long it takes to build infrastructure in North America,” Wuori says.
“Part of the thinking is that as they see positive motion on the pipeline, they can also prepare for whatever crude slate they want to run.”