The Canadian government’s eagerness to attract Chinese investment is on track to yield a quick result in the energy sector.
Enbridge is brimming with confidence that a preliminary deal will be reached before the end of February involving one or two of China’s largest state-owned energy companies and a Canadian bitumen producer, while oil sands newcomers UTS Energy and Synenco Energy are hinting they could sign on major Chinese partners by mid-2005.
Adding to the momentum is talk of an imminent Canada-China Framework on Energy Cooperation that would cover oil, natural gas and nuclear power to narrow the gap between Canada’s desire to attract foreign investment to hasten the development of its abundant natural resources and China’s global hunt for new energy supplies.
However, because of North American free trade agreements that give the United States preferential access to Canadian oil and gas, it is believed the Chinese are uneasy about the impact on any investments in Canada should there be a rift between Beijing and Washington.
Chinese interest not new, speed of events is
The news of Chinese interest and possible investment in the oil sands is not new.
What is new is the speed with which events are unfolding. Several Canadian energy executives say the pace has moved to a gallop over the last two months, challenging the notion that negotiations with the Chinese take forever.
UTS and Synenco, two junior companies who are grappling with the challenges of raising debt and equity to finance their schemes, have not ruled out the possibility of selling controlling interests..
“We are willing to consider any and all structures,” Synenco President/Chief Executive Officer James Donnell, a former president of Duke Energy North America, told an Insight Information oil sands conference in Calgary Jan. 12.
William Roach, president of UTS, told the same conference an outsider could acquire 50 percent to 66 percent of the Fort Hills project.
Without naming names, both executives made it clear that the interest is coming from Asia, particularly from China, where state-owned Sinopec and PetroChina have been identified by Enbridge as the frontrunners to take a role in the oil sands.
Work needed, particularly pipeline link
Donnell emphasized that there is “still work to be done,” especially to build a pipeline link from northern Alberta to a deepwater port on the British Columbia coast.
But he said the pace of conversations suggests a partnering deal with Synenco’s Northern Lights proposal could be inked much sooner than expected.
“You might get it done in the second quarter, whereas I would have thought, previously, the third quarter or even the fourth,” he said.
Donnell said privately held Synenco does not have the ability on its own to raise C$2.6 billion in debt and equity.
Given that, it is ready to sell a majority stake to third parties who have expertise in mining, extraction, upgrading and possibly would build, own and operate a C$900 million gasification plant to supply the bulk of Northern Light’s power needs.
Northern Lights hopes to get regulatory approval this year, start construction by mid-2006 and come on stream in 2009, with an ultimate goal of producing 100,000 barrels per day.
Fort Hills, which expects to spend up to C$2 billion on its first phase, is also aiming for a 2009 start-up at 50,000 bpd and eventual capacity of 235,000 bpd.
Enbridge: Preliminary deals could be signed in February
The odds of China becoming a market for oil sands production shortened appreciably on Jan. 13 when Richard Bird, Enbridge’s vice president of Energy Transportation North, told the Insight conference that preliminary deals to underpin the C$2.5 billion Gateway project could be signed before the end of February.
He said Sinopec and PetroChina are contenders for memorandums of understanding to become anchor shippers on the 400,000 bpd pipeline to either Prince Rupert or Kitimat.
What Enbridge is looking for are 15-year shipping commitments covering 100,000 bpd to 200,000 bpd to set the stage for filing regulatory applications.
Bird said deals of that order with the Chinese and at least one Canadian producer would give Enbridge a base to build on and lead to binding contracts by mid-2005.
Although Enbridge has said it is willing to sell a 49 percent stake in Gateway, he said the primary interest among the Chinese companies is supply.
Once Enbridge has locked up one or two shippers for half the capacity of Gateway, it is confident the balance can be accounted for in contracts of 25,000-30,000 bpd each.
Enbridge rival Terasen is also chasing customers for a possible northern route pipeline to ship 500,000 bpd to Prince Rupert or Kitimat.
Canadian trade mission in China
Stoking the fires, a Canadian trade mission led by Prime Minister Paul Martin and International Trade Minister Jim Peterson is currently in China to strengthen links between the two countries.
The mission, which ends Jan. 25, includes 375 representatives from 280 companies, government departments and government agencies.
It occurs against a background of speculation that the Martin government is ready to sign a bilateral pact, separate from the energy cooperation deal, that would elevate trade relations to a new level by giving legal standing to investors in both countries.
Martin, while insisting he is not avoiding China’s troubled human rights record, has described China as a “very, very important market for us. Anything we can do to strengthen the links between the two countries is a good thing.”
To date, he has ignored pressure from many quarters to intervene if state-owned Chinese companies start spending billions to take control of energy, metals and lumber firms.
Martin has welcomed Chinese interest in Canada’s resource sector as a sign of China’s “increasing growth and maturity.”
Canada’s two-way merchandize trade with China reached C$23.3 billion in 2003, up 16 percent from 2002, making China its second largest trading partner after the United States.
But that volume is insignificant alongside the two-way flow of goods across the Canada-U.S. border that averages about C$2 billion a day.
However, given the mounting U.S. debt, a soaring U.S. trade deficit, a slumping greenback and a string of new free-trade deals signed by Washington, the Martin government is anxious to diversify its trade options.
For all of the growing expectation of oil sands deals, there are some voices of caution.
Senior executives of Husky Energy and Canadian Natural Resources, while confirming the flurry of discussions with Chinese delegations, suggest that China is still window shopping.
Bob Shepherd, Husky’s general manager of oil sands, told the Insight conference that a lot of the focus has been on helping the Chinese “further their knowledge” of all aspects of the oil sands and the intricacies of Canada’s oil business.
Real Doucet, senior vice president at Canadian Natural, echoed that the Chinese interest in acquiring a stake in the oil sands is still “very exploratory.”
