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July 2007

Vol. 12, No. 29 Week of July 22, 2007

China quits sands pipeline in a huff

Abandons role in plans to ship Alberta oil sands production to Chinese refineries, accuses Canadian government, producers of blocking Chinese access to markets; Enbridge says discussions continue with possible California, Asian buyers

Gary Park

For Petroleum News

In a scathing public attack on the Canadian government, China’s giant oil company abandoned its role in plans to ship Alberta oil sands production to Chinese refineries.

China National Petroleum Corp., the largest of China’s state-owned oil companies, accused the government of failing to do more to overcome aboriginal and environmental opposition to Enbridge’s proposed Gateway project.

The C$4 billion venture involves a 720-mile pipeline, delivering 400,000 barrels per day to a deepwater port at Kitimat on the northern British Columbia coast for tanker delivery to Asia and California.

For more than two years, PetroChina, a unit of CNPC, has been attempting to secure a role as anchor tenant on the pipeline by working with Enbridge to aggregate 200,000 bpd of new production. It has also been offered a 49 percent equity stake in the project.

But CNPC Vice President Yiwu Song told an oil sands conference in Calgary July 12 that the government of Prime Minister Stephen Harper has not done enough to support the pipeline and facilitate energy trade between Canada and China.

He said it will “take at least 10 years” to bring Gateway into service. Enbridge, in a revised timetable, has targeted 2012-14 for startup.

“We just cannot play this game too long,” Song said. “We have to focus on our big business.”

Song said CNPC “sincerely wanted to do something and open up a new market for Canadian crude, but Canada doesn’t want to open up its own markets to us. So we cannot cooperate.”

He also accused Canadian oil producers of being unwilling to commit enough supplies to Gateway to make it viable.

As a result, PetroChina will not renew a memorandum of agreement with Enbridge and turn its attention, instead, to unconventional oil prospects in Venezuela, where it is building two upgraders to process 600,000 bpd of production for export to China within five years.

He said Venezuelan strongman President Hugo Chavez, who is taking aggressive steps to nationalize parts of his oil industry, is “so warm-hearted,” in contrast with the reception CNPC received in Canada.

Canadian perspective different

That is inconsistent with the Canadian perspective on the dealings with PetroChina.

A year ago, Enbridge Chief Executive Officer Pat Daniel said the Chinese were “looking for a level of familiarity” before they entered binding contracts on Gateway.

He said the complex negotiations were moving forward as potential shippers and customers became “more comfortable doing business with each other.”

By late 2006, Daniel said Enbridge was shifting its priorities to North American pipeline projects because of slow progress by Chinese customers to enter majority equity deals or joint ventures with oil sands producers.

As a sign of good faith, federal Natural Resources Minister Gary Lunn and Greg Melchin, then Alberta’s energy minister, held follow-up meetings with Chinese government officials and the country’s major oil companies, including CNPC, to promote the Gateway project and assure the Chinese that Canada would be a reliable source of crude.

Enbridge officials say Gateway still alive

Enbridge officials declined to comment on Song’s remarks, citing confidentiality agreements.

However, they were adamant that Gateway remains alive, even though Enbridge last year postponed the original completion date of 2010 because of slow progress toward long-term shipping contracts, preferring to concentrate on pipeline expansions to Eastern Canada and the United States.

They said discussions are continuing with other possible customers in China, Japan and Korea as well as California, which has been targeted for 30 percent of Gateway’s volumes, although that market is increasingly in doubt as the state seeks ways to lower its dependence on fossil fuels, notably from sources such as the oil sands that generate high levels of greenhouse gas emissions.

Enbridge says the allocation of Gateway shipments will eventually be determined by the customers.

For all of its frustration over Gateway, CNPC shows no signs of shedding the 11 Alberta oil sands leases it acquired in January, with the intention of eventually developing the resources estimated at 1.97 billion barrels of recoverable bitumen.

But Song, expressing concern about the high front-end costs of oil sands projects, said commercial production from the properties could be at least a decade away.

EnCana expects surplus

In other developments at the Calgary conference:

• EnCana oil sands President John Brannan said his company expects a surplus of production even after its 50 percent owned U.S. refineries, part of the joint venture with ConocoPhillips, start processing bitumen. He said that excess could be diverted to merchant upgraders in Alberta, marketed through other refiners, upgraded at an EnCana-owned plant, or processed and shipped to the joint venture’s Wood River and/or Borger refineries if the joint-venture expanded those facilities.

• Husky Energy is also hunting for additional North American refining capacity to process future volumes from its projects, despite its acquisition of Valero Energy’s 160,000 bpd Lima, Ohio, refinery. That could see Husky follow the lead of EnCana by swapping some of its oil sands equity for a stake in a U.S. refinery, oil sands Vice President Garry Mihaichuk said. Husky expects its 200,000 bpd Sunrise project will come on stream in 2010, while production from all of its oil sands ventures is expected to reach 500,000 bpd by 2020.

• Devon Canada President Chris Seasons said his company is unlikely to invest in an upgrader or refinery to handle 35,000 bpd from the second phase of its Jackfish operation. In preparation for final project approval, likely by early 2008, Devon is in discussions with Alberta-based upgraders.

• Shell Canada expects to launch the first phase of its Orion project in northwestern Alberta at 10,000 bpd this summer and decide sometime next year whether to double output.






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