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Pushing an Asian option Canadian industry, Alberta government seek alternative outlet for oil sands crude, prodded by concerns over U.S. climate change legislation Gary Park For Petroleum News
A push from the United States and a nudge from China have stirred fresh interest among those who believe it’s vital to open up Asian markets for Canadian oil sands production.
But the road to the Far East is littered with all kinds of pitfalls.
There’s the usual challenge for pipeline companies — in this case Enbridge and Kinder Morgan — of lining up producers and buyers.
Add to that, growing resistance from First Nations and environmentalists and uncertainty surrounding the future of oil sands development.
But the Canadian industry and the Alberta government sense the urgency of finding alternative outlets for their production as a hedge against whatever measures the U.S. might impose as part of climate-change legislation.
The warning bells grew louder in early April when leading Democrats in the U.S. Congress unveiled a bill to cap greenhouse gas emissions, partly by imposing fees on exporters of a wide range of products to the U.S. from countries that don’t have the same stringent regulations, reporting rules or enforcement measures as those contained in the legislation.
In addition, new mandatory fuel standards being considered by President Barack Obama aimed at curbing GHGs could reduce U.S. oil demand by 20 percent, according to some estimates.
Race for GHG agreement Amy Myers Jaffe, an energy policy expert from Rice University, told a Calgary conference on April 1 that there is little chance of a turn-around in the course being pursued by the Obama administration, causing her to suggest that 100 million barrels per day of production could be the plateau of international supply and demand.
Canadian Prime Minister Stephen Harper’s government is in a race to seek a continental GHG agreement with the U.S. to shield Canadian industries from U.S. climate change regulations.
To that end, Canadian cabinet ministers have hinted that Canada is open to rethinking its plans for intensity-based GHG targets, which tie reductions to units of production, and would consider absolute caps, regardless of increased output.
As part of Canada’s efforts to keep pace with the U.S., Environment Minister Jim Prentice indicated in April that the Harper administration will harmonize its fuel standards for vehicles with existing and future U.S. regulations.
“We do not have the luxury of time,” he said. “We are moving immediately on these measures.”
Non-U.S. export markets sought No longer able to assume the U.S. will retreat from tough climate-change action until the economy has recovered, leaders of Canada’s oil and gas industry and Alberta Premier Ed Stelmach have decided they need to hasten the search for oil export markets in addition to the U.S.
David Collyer, president of the Canadian Association of Petroleum Producers, bluntly told the Calgary Chamber of Commerce in March that his industry sees “potential constraints to access to the U.S. market. I think the only realistic option, as an alternative to the U.S. in the near term, would be exports off the West Coast to the Far East.”
He conceded that means dealing with environmental opposition and securing financing for such a project, but said “Both of those issues can be addressed.”
Stelmach, while focused on keeping as much processing as possible of raw bitumen within Alberta, said his government believes that accessing Asia is needed to reduce dependence on U.S. hydrocarbon consumers.
“It’s our duty as a government of Alberta to look for different markets,” he said.
As part of its long-term plan for the oil sands, the province has already said it must: “Identify and target key global markets that offer attractive opportunities for Alberta’s oil sands products to achieve a more diverse and resilient customer base.”
But the government has yet to say in more detail how it hopes to achieve that goal.
Other than trying to increase shipments to California (increasingly a doubtful prospect because of the state’s out-front approach on climate change) or through the Panama Canal to U.S. Gulf Coast refineries, Asia is the most obvious alternative.
The effort to reach the East For seven years, Enbridge has been exploring ways to get oil sands crude across the Pacific and Kinder Morgan (formerly Terasen) entered that picture about five years ago.
Initially, the emphasis was largely on doing business with China, a prospect that gathered pace when state-run firms Sinopec and China National Offshore Oil Corp. took minority stakes in startup oil sands projects and China National Petroleum Corp. bought undeveloped leases, sending out signals that China was interested in diversifying its search for energy security into Canada.
That pace quickened when Enbridge and PetroChina teamed up in a bid to aggregate 200,000 barrels per day to support Enbridge’s proposed Northern Gateway pipeline from the oil sands to British Columbia’s deepwater port at Kitimat — a plan that collapsed in mid-2007 amid bitter allegations by PetroChina that the Canadian government and producers had no desire to support the venture.
On the surface, it was only a small shift on April 1 when Sinopec increased its holding in the Northern Lights project, operated by France’s Total, to 50 percent from 40 percent for an undisclosed sum.
In the process, Sinopec offered no explanation of its oil sands strategy, which started in 2005 with a C$105 million investment, but its parent company China Petroleum & Chemical Corp. said March 29 it is eyeing overseas projects for its exploration and production business, given that low oil prices have created “more opportunities for upstream transaction,” said Chairman Su Shulin.
Sinopec, the world’s second largest refiner after ExxonMobil, and PetroChina are placed at the leading edge of China’s efforts to secure its growing energy needs.
More Chinese buys possible Wenran Jiang, a research chair at the University of Alberta’s China Institute, told the Financial Post that the Chinese could be on the verge of more oil sands acquisitions because they believe oil prices will rebound.
“The question is the speed and scale … (but) the Chinese are cautious; they don’t want to make a big fuss.”
Jiang said a plus for the Alberta government is that the Chinese would likely build heavy oil upgraders in the province rather than ship unprocessed oil to the U.S. for refining.
Total, which is engaged in its own unsolicited bid to takeover UTS Energy, a 20 percent partner in Petro-Canada’s Fort Hills venture, said the change in the Northern Lights partnership opens the way for Total and Sinopec to collaborate in developing oil sands resources.
A year ago, Enbridge bounced back from its split with PetroChina when Chief Executive Officer Pat Daniel said there had been renewed interest in Northern Gateway from potential customers in the Japan-Singapore region, excluding China. South Korea and Taiwan have also been flagged as possible buyers.
Daniel said Canada needs a more diverse market to create “pricing tension” and “that’s what Northern Gateway is all about.”
Ten companies have since committed C$100 million to help steer Northern Gateway through the planning and regulatory phases.
Last October, Enbridge said it might be ready to file a regulatory application in 2009 with the National Energy Board, but the company has not been available to indicate whether that target remains alive.
However, the wheels have been set in motion to establish a joint environmental review panel under the NEB and the Canadian Environmental Assessment Agency, with an April 14 deadline for public comments on the terms of reference.
First Nations’ protests Those advances have also been accompanied by a gathering storm, notably from aboriginal communities.
The Carrier Sekani, representing 10,000 people in eight First Nations whose land occupies one-third of the pipeline route, has given a cold shoulder to the NEB process.
Grand Chief David Luggi, with memories of the Exxon Valdez disaster still fresh, said a single oil spill could destroy the fisheries in northern British Columbia rivers.
The Council of the Haida Nation, which embraces the Queen Charlotte Islands, is even more emphatic that it wants nothing to do with Northern Gateway, arguing that tanker traffic could jeopardize the livelihoods of its people.
The council is backed by three public inquiries over the last 30 years that concluded the risk of a disastrous spill from increased tanker traffic on B.C.’s coast is profound, regardless of Enbridge assurances about double hulls, experienced local pilots and accompanying tugs.
The Gitga’at First Nation said the terms of reference for the joint review panel do not respect its constitutional rights to participate in the decision-making process.
In one tacit acknowledgement that it faces a tough job winning over aboriginal communities, Enbridge suggested last year that it does not rule out an equity stake in Northern Gateway for First Nations.
Quarterly disclosures demanded The rising tensions have aroused Vancouver-based Ethical Funds, which owns about 500,000 of Enbridge’s 373 million shares. It has demanded quarterly disclosures on the negotiations between the company and First Nations and plans to make its case to Enbridge’s annual meeting in May. Enbridge has yet to respond.
Meanwhile, Kinder Morgan, is quietly weighing its next major pipeline move, including the possibility of exporting to Asia through its TransMountain pipeline to a marine terminal in Vancouver or a northern route expansion of TMX.
It offers prospective shippers the choice of two routes to Asia — the existing 300,000 bpd southern leg to its Westridge Marine Terminal in Vancouver (as well as refineries in Washington State’s Puget Sound), which could be expanded by 400,000 bpd. Also on the table is a possible 400,000 bpd northern route extension of TransMountain. Northern Gateway is currently proposed as a 525,000 bpd system. Both companies include possible shipments to California and the U.S. Gulf Coast in their thinking.
In fact, Kinder Morgan shippers are already testing the full range of options, with 10 percent of its volumes currently heading to Asian refineries, while the rest is delivered to the U.S. West Coast or moved through the Panama Canal.
Shippers looking for fit Kinder Morgan spokesman Andrew Gilarnyk told Petroleum News the shippers to Asia want to determine “if there is a fit for Canadian crude” in those markets and determine whether they can underpin the interest with “some long-term contracts.”
He said Kinder Morgan’s earlier plans to hold an open season for its northern route are now “quite a bit further out. … We’re quite interested in seeing where the southern option (to increase shipments to the U.S.) will take us. It is probably a lower-cost option and we’ve already got infrastructure and rights-of-way in place.”
Gilarnyk said an open season to expand the existing TMX pipeline could be held within 12 months “depending on where the market and the whole economy are going.”
He also said Kinder Morgan is able to expand the Westridge terminal, which currently handles Aframax tankers, but that decision will be driven by shippers.
Among producers there is a guarded reaction to making contractual commitments to Asia, although Suncor Energy’s chief executive officer Rick George said his company is looking for ways to extend its market reach within North America as well as to Asia.
Husky Energy and Canadian Oil Sands Trust, the largest stakeholder in the Syncrude Canada consortium, say their priority is chasing markets that offer the highest netbacks, which undermines Asia because of the shipping costs.
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