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Vol. 10, No. 35 Week of August 28, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

Hu’s on first, Cheney’s at bat

China, United States on back-to-back missions to Canada as both countries take aim at oil sands to shore up energy security

Gary Park

Petroleum News Canadian Correspondent

With North American trade relations at their lowest ebb in anyone’s memory, the stakes will be raised in September, if only symbolically, when Canada plays host to two of the world’s most influential politicians.

U.S. Vice President Dick Cheney and Chinese President Hu Jintao are staging back-to-back visits at a time when their interest in Canadian oil, especially the Alberta oil sands, is climbing to new heights.

For those trying to discern some deeper significance, Hu’s visit is a lengthy, elaborate affair; Cheney’s itinerary seems to have been hastily assembled.

So far, in fact, only the Alberta government and the Fraser Institute, a right-wing think tank, have even said Cheney is heading north of the 49th parallel. There has been no confirmation from Washington.

The program, according to the Canadian sources, includes a tour of the oil sands and a Sept. 8 dinner in Calgary for a select group of high-profile business leaders and provincial premiers, some of whom will pay C$10,000 a plate for a chance to bend the ear of President George W. Bush’s right-hand man.

Hu’s first trip to North America since becoming China’s supreme leader in 2003 covers the Sept. 8-17 period, with stops in Vancouver, Ottawa and Toronto and a state banquet hosted by Prime Minister Paul Martin.

High-level talks have been abandoned

Cheney will arrive amid a brittle state of affairs over the softwood lumber dispute that has prompted the Martin government to abandon high-level talks, pending an unscheduled call when Martin plans to register his concerns with Bush about what one Canadian government official said are the “fundamental tenets of the trading relationship between the two countries.”

Faced with the Bush administration’s refusal to abide by four trade panel rulings favoring Canada in the lumber dispute, some federal, provincial, business and labor leaders are urging Martin to retaliate against Washington by playing the ultimate trump card.

Brian Payne, president of the 162,000-member Communications, Energy and Paperworkers Union of Canada, thinks it is time for Canada to “show some guts” by turning off the taps on oil and gas exports.

“What’s the point of having a mechanism to resolve trade disputes when the other side just simply ignores it?” he said.

“Obviously it’s a dramatic thing to say, ‘Close the tap.’ But there’s got to be some quid pro quo in this life. That’s the point. This is not nickels and dimes. We’re talking billions,” Payne told the Vancouver Sun.

Peter Clark, a Canadian trade consultant, suggested the federal government should cut off U.S. access to Canada’s energy reserves.

“The best strategy is always to find out where the soft underbelly is and than target it,” he said.

Softwood negotiator cautions against revenge

Paul Tellier, Canada’s lead negotiator in the softwood talks, cautioned against exacting revenge from the United States, arguing that an angry response would be a “bit like pissing in a snowbank — you get a bit of relief, but it’s not that long-lasting.”

“I’m not for a trade war,” he said, when reacting to those calling for holding back energy shipments. “I’m very much in favor of negotiations and making sure agreements we have are respected.”

Tellier agreed with David Wilkins, U.S. ambassador to Canada, that the dispute should be resolved through negotiations.

Wilkins said both countries have a responsibility to reach a settlement.

“People should downplay what’s happened so far, close the door and roll up their sleeves,” he said.

While generally taking a measured approach, senior cabinet ministers in the Canadian government indicated how close they are to breaking point.

Industry Minister David Emerson said he was in a state of “disbelief at how the Americans have just thumbed their nose at the rule of law. It starts to force people to look at the whole big picture of what we’re going to do in terms of trade strategy over the next decade or two.

“I think we’ve become somewhat dependent on a trading partner who just refuses to play by the rules that we need to diversify our markets,” Emerson said, fueling the notion that Canada should look as much to Asia as the United States in exporting production from its oil sands.

Harsh message from Ottawa

Finance Minister Ralph Goodale delivered the harshest message from Martin’s inner circle.

He said Canada has felt the “painful sting of knee-jerk protectionism” over the last couple of years with Washington closing the door on the “free and fair movement” of Canadian wheat, lumber and beef.

Without getting into specifics, he said Canada is determined to see that the United States is forced to abide by “clear, legal, unequivocal, unambiguous” legal trade rulings.

Goodale and Emerson said Aug. 23 that the government is identifying sectors where Canada could impose tariffs on U.S. imports and place maximum pressure on Washington.

There is nothing to indicate the timing of the Cheney and Hu visits is more than coincidence, but they occur at a pivotal time as China scours the globe for energy supplies, having seen China National Offshore Oil Corp’s bid for Unocal so resoundingly spurned.

Three of China’s state-owned oil enterprises have staked claims in the oil sands sector — two with junior production start-ups and one with Enbridge’s planned Gateway pipeline — giving a strong vote of confidence to a resource that has enabled Canada to elbow Saudi Arabia out of its No. 1 spot as crude supplier to the United States.

Although Hu has no oil sands stop on his agenda, the length of his visit is a major step for Canada-China relations, said Yuen Pau Woo, vice president of the Asia Pacific Foundation of Canada.

He told the Vancouver Sun that Hun is not merely “dropping by for a quick handshake. This is a commitment to forge a relationship at the highest level.”

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Asian tigers maul each other over oil and gas

So much for the non-compete deal between China and India as the two energy-hungry Asian giants battle over some of the planet’s largest oil and gas prospects.

Less than a week after they signed agreements to bid jointly for foreign assets, the Chinese have outbid India for PetroKazakhstan, tightening a grip on the oil rich former Soviet republics of Central Asia.

China National Petroleum Corp. or CNPC, China’s biggest oil firm, appeared to clinch a US$4.18 billion cash bid for PetroKaz — a 21 percent premium over the previous closing price — edging out an Indian consortium consisting of state-owned Oil and Natural Gas Corp., ONGC, and Indian steel billionaire Lakshmi Mittal, which reportedly had outbid the Chinese until CNPC was asked to rebid.

The Indian consortium, which is targeting purchases in 22 countries, may yet return with a higher bid, said ONGC Chairman Subir Raha.

PetroKaz cannot solicit offers

The deal with CNPC blocks PetroKaz from soliciting any offers, but the company can accept a superior bid so long as CNPC has a chance to submit a matching offer and it is prepared to pay a US$125 million break-up fee.

Another wild card could be the mercurial Kazakhstan government, which made life so miserable for PetroKaz because of its apparent collusion in a series of legal actions that it forced the Calgary-based company to fold its tent.

The government has right of first refusal on the disposal of assets, but PetroKaz Chief Executive Officer Bernard Isautier insists that legislation is not relevant because Canadian securities are being sold, not oil assets.

He did not expect any legal challenge given CNPC’s “excellent relationship” with the Kazakh government and with Russia’s KazMunaiGaz, which was listed among companies in the running for PetroKaz.

If CNPC locks up the purchase, China gets access to 550 million barrels of reserves and potentially 170,000 barrels per day of production.

The Kazakh and Chinese governments are also working on plans for a 1,900-mile pipeline from the giant Caspian fields to China’s own Xinjiang pipeline system.

In addition, PetroChina has ownership stakes in Kazakh oil and gas condensate fields which were pumping 124,000 bpd earlier this year.

What the outcome holds for the China-India pact is not immediately clear.

Some observers believe the entente may even have been a result of the competition for PetroKaz and an acceptance by both countries that they were in danger of over-paying for assets in their quest for energy security.

—Gary Park