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Vol. 10, No. 23 Week of June 05, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

Chinese invasion troubles U.S.

Sinopec joins CNOOC, PetroChina in Alberta oil sands, causing worries in Washington over loss of Canadian crude for North American market

By Gary Park

Petroleum News Canadian Correspondent

Three of China’s energy giants are now players in the Alberta oil sands at the same time anxiety is building in Washington, D.C., over the loss of Canadian crude production to Asia.

The drive by state-owned enterprises to diversify China’s sources of foreign oil is causing concern in U.S. government circles “because they want to know what’s going on with China,” said Murray Smith, Alberta’s former energy minister and the province’s top representative in the U.S.

“There’s no question that the U.S. wants every barrel of energy (in the Western Hemisphere) for itself,” he told a Calgary business audience May 30, the day before the latest deal with a Chinese company was unveiled.

In the space of six weeks, Sinopec has paid C$105 million in cash for a 40 percent stake in oil sands start-up Synenco Energy and CNOOC (China’s international oil explorer) put down C$150 million for 16.69 percent of MEG Energy, another privately held oil sands newcomer.

200,000 bpd in two PetroChina transactions

Between the two transactions, PetroChina and Enbridge signed a memorandum of understanding to arrange 200,000 barrels per day of oil sands production to fill half the capacity of Enbridge’s planned Gateway pipeline to a northern British Columbia deepwater port.

Those modest investments could translate into billions of dollars if Sinopec and CNOOC cover their full share of capital costs.

Synenco is operator of the C$4.5 billion Northern Lights project, which is targeted for start-up in late 2009 or 2010 at either 50,000 bpd (doubling in size at a later date) or 100,000 bpd. It has 1.5 billion to 2.5 billion barrels of oil in place.

MEG is aiming to produce 25,000 bpd in 2008, growing to 145,000 bpd, on leases covering 33,000 acres with 4.8 billion barrels of bitumen in place.

Both CNOOC and Sinopec have made it clear they want to get in on the ground floor of new projects and participate in evolving technologies.

Good for Alberta, says Smith

Smith said the United States is not just interested but concerned about potential exports from the oil sands to China and multiple other markets.

If Alberta, for the first time, exports to markets other than the United States that “could put additional upward pressure on the price of oil in North America,” he said.

But he was unapologetic that the United States would no longer be able to take the oil sands for granted.

“Having access to the world market will be beneficial to Alberta producers,” he said.

“This is one of the best times for Alberta’s economy …and I think that our ability to have multiple market access will reinforce that.”

Smith said there is no reason why the Gateway pipeline should be a source of Canada-U.S. friction, given that Enbridge hopes to ship 100,000 bpd to California refineries, which are facing dwindling volumes from Alaska.

Since the Alberta office opened in March, Smith said his job has been to “quell rumors and you do that by communicating. It’s like, ‘Let me see, you use 20 million bpd and you’re concerned about 250,000 bpd from the Alberta oil sands going to China?’”

Cautioned against using China as leverage in lumber, beef disputes

But he cautioned that Canada would be unwise to play China against the United States or use energy as leverage to settle long-standing disputes over softwood lumber and beef.

Earlier this year, Smith’s successor, Greg Melchin, said he was “nervous” at the prospect of China’s state-owned enterprises buying into the oil sands.

He said foreign government ownership of the resource could see Alberta bitumen diverted out of Canada for upgrading and processing, putting tens of thousands of jobs at risk in Canada.

Jim Donnell, president and chief executive officer of privately-held Synenco, told Petroleum News he could not comment on the geo-political debate over where oil sands production is exported, but he insisted that 100,000 bpd of new supply from Northern Lights “is a good thing for every region.”

He said Sinopec has not indicated where its 40 percent share will go. Synenco will only make up its mind closer to the start-up date, although to many observers China will be the destination.

On the plus side, Donnell said Sinopec, a producing, refining, marketing and petrochemical giant, brings a full range of expertise to the partnership, meaning the Northern Lights is “now real, with a high degree of certainty.”

He said Sinopec’s experience includes the engineering, designing and construction of 26 refineries with 3 million bpd of capacity, giving Synenco optimism that its Chinese partner can keep capital costs under control.

UBS Securities Canada, in a research note, estimated Sinopec paid less than half the cost per barrel of the MEG investment by CNOOC.

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