China tests investment, security laws

Whatever U.S. politicians might think about the “dirty” nature of the Alberta oil sands they show signs of even greater concern as the Canadian government embarks on a review of PetroChina’s planned Great Leap Forward (to borrow a line from Chairman Mao) into northern Alberta.

Grabbing a 60 percent stake in fledgling oil sands projects by privately held Athabasca Oil Sands Corp. is little more than one small step.

If the deal is concluded, it gives PetroChina access to 5 billion barrels of recoverable bitumen (the oil sands have an estimated 174 billion barrels), but, according to AOSC officials, would require the Chinese giant to invest anywhere from C$9 billion to C$12 billion to bring the resources into production.

And, for now, AOSC is delicately sidestepping two key questions: If and how the production would be delivered to China and whether PetroChina might ultimately buy the remaining 40 percent of the MacKay River and Dover projects.

There were barely disguised mutterings of unease from the U.S. when PetroChina signed an agreement with Enbridge to advance plans for Enbridge’s Northern Gateway pipeline from Alberta to the deepwater port at Kitimat, British Columbia, for tanker shipment to Asian refineries, with China the obvious candidate.

But PetroChina quit the venture in a huff two years ago, lashing out at the Canadian government and producers for not backing its efforts to line-up 200,000 barrels per day of Gateway volumes and possibly take a 49 percent equity stake in the pipeline.

That also seemed to put a damper on plans by Sinopec and China National Offshore Oil Corp. to advance their minority interests in two formative oil sands projects to the commercial stage.

PetroChina changes equation

Nothing on that scale has previously been tried by a Chinese company seeking a role in the development of Canada’s natural resources.

And it’s a benchmark test for the Canadian government’s 2007 legislation to screen investments by foreign state-owned companies in Canada.

Under the Investment Canada Act, any international firm acquiring a controlling interest in a company with assets worth more than C$600 million is subject to federal review.

The vetting requires the buyer to demonstrate that there is a net benefit to Canada in the deal.

The government has also added a national security test that requires input from departments responsible for Canadian security.

That amendment allows reviews if the minister responsible “has reasonable grounds to believe an investment by a non-Canadian could be injurious to national security,” but the statute does not define what is meant by “national security.”

Guidelines introduced by the government of Prime Minister Stephen Harper will restrict investment approvals to companies that have transparent and commercially oriented corporate governance.

Harper said Sept. 1 that the PetroChina-AOSC deal is more controversial than a private sector, foreign investment in Canada would be.

“I will just say that there are laws in place to review foreign investment transactions when they meet a certain threshold and our government has strengthened those reviews by including a clause that allows officials to examine issues of national security,” he told reporters.

Heads up in Canada

AOSC chairman Bill Gallacher said only that his company gave the Canadian and Alberta governments a heads-up that the deal was coming. “We know there will be some (regulatory approvals needed), but we just don’t know which ones,” he told a conference call.

He said AOSC will follow the procedures “until all the government agencies are fully satisfied and this transaction can move forward.”

Although there has been a concerted push in some U.S. political and environmental circles to join a global movement aimed at shutting down the oil sands because of their impact on land, water and air, along with wildlife and northern Alberta residents, there is a constituency concerned about the prospect of losing the United States’ exclusive access to Canada’s oil and natural gas resources.

Carolyn Batholomew, chair of the U.S.-China Economic and Security Review Commission, told the Globe and Mail that the PetroChina-AOSC deal should “Raise national security questions for both” Canada and the U.S. governments, although she did say the final decision should be Canada’s.

She said PetroChina, Sinopec and CNOOC are heading China’s drive for energy security, but none is a commercial company, raising concerns about the growing Chinese presence in the U.S. “backyard.”

“Some people believe they function a little independently, but the reality is they are controlled by the government and, for that matter, they are controlled by the Communist party, which of course controls the government,” Bartholomew said.

The commission was created by Congress in 2000 to track China’s economic expansion and measure the impact on U.S. security interests.

U.S. not expected to block investment

But Giffin said the deal will draw attention to the strategic importance of the oil sands at a time when U.S. environmentalists are urging punitive measures to slow development.

He said the time is appropriate to turn U.S. attention to the “value of assets sitting in Alberta and not enough thought is given in Washington to that strategic value.”

Canada’s Environment Minister Jim Prentice is one of the leading voices in cabinet urging diversification of Canada’s oil market.

“We need transportation mechanisms to ship it to the (British Columbia) coast,” he said. “Refineries in the U.S. have limited capacity and we don’t have anywhere else to sell it. Having the capacity to ship it to the West Coast would keep everybody honest, so I think that’s good policy.”

—Gary Park