The Canadians might not be allowed to build a pipeline going south to the Texas Gulf Coast, so now they’re determined to build one going west to the Canadian Pacific Coast.
After President Obama rejected the Keystone XL pipeline last month, the conservative Canadian government has begun looking for another potential buyer for the oil that was intended for the pipeline. That buyer is China, the energy-craving economic giant that’s already invested more than $16 billion dollars in the Canadian oil industry in the last two years.
Canadian prime minister Stephen Harper went to China Tuesday with a delegation of 40 Canadian business leaders to discuss energy....
In a word: PIPELINE.
Among members of the Texas congressional, there’s regret and disappointment that the oil intended for the U.S. may now be purchased by China.
“It’s outrageous and unacceptable to drive our friends the Canadians into the arms of China,” Rep. John Culberson, a Houston Republican, told Texas on the Potomac. “Next to our national debt, the communist Chinese government is the biggest threat to American national security in the 21st century.”
Culberson blamed the Democratic administration for the latest twist in U.S.-Canadian relations.
“President Obama has once again strengthened the Chinese, weakened the United States and driven one of our best friends into the arm of our worst enemy,” he said.
Culberson isn’t the only Texan lawmaker who is sad and angry to see the Canadian oil going to China instead of United States.
“It means that we have to import from Saudi Arabia and other countries that may not be nearly as friendly toward the United States as Canada. It makes so much more sense to import from our Canadian ally,” Rep. Gene Green, the Democrat from Houston.
The Republican majority in the House of Representatives is still trying to make the pipeline happen through legislation that Green recognizes “probably hasn’t got a chance to pass through the Senate.”
China’s Achilles’ Heel....
By Minxin Pei
With little in the way of force projection, China’s dependence on natural resources in unstable parts of the world could undercut its economic ambitions. There are limits to free-riding....
The seizure of 29 Chinese workers by Sudanese rebels in the southern part of Sudan last week exposed one of the most vulnerable links in China’s ambitious plan for extending its economic influence abroad. To be sure, this isn’t the first time workers sent by China to dangerous regions were kidnapped or harmed. Five years ago, three Chinese engineers were murdered by a militant group in Pakistan. When civil war broke out in Libya nearly a year ago, Beijing had to dispatch a fleet of ships and airplanes to evacuate more than 30,000 Chinese workers from the country.
Despite the release of the workers this week, such incidents – and there will be many similar ones in the future – raise several important questions about China’s strategy of “going out” in general, and its quest for natural resources in particular.
The motivations for Beijing to expand its economic reach across the globe are easy to understand. The Chinese economy is resource-intensive and depends on secure access to energy, minerals, and other commodities to sustain its growth. Unfortunately, the geopolitics and economics of natural resources are tricky. Most of them are located in unstable or war-torn countries, with poor infrastructure, corrupt governments, and intractable ethnic conflict. The global markets for natural resources are notoriously volatile and frequently go through boom-bust cycles. Worse still, as a late-comer to the scene, the low-hanging fruits have already been picked by entrenched and powerful Western multinationals, such as Exxon, Shell, BP, Rio Tinto, BHP, and the likes, which have established seemingly unchallengeable advantages in technology, capital, and risk management.
Faced with such a strategic landscape in the competition for natural resources, China has long concluded that it will risk letting its economic security held hostage by the vagaries of the market and the entrenched Western giants if it doesn’t make a concerted all-out effort to gain direct access to strategic natural resources. The policy and actions flowing from this strategic assessment in the past decade are easy to see: China has become the world’s most aggressive player in competing for access to natural resources. It has tied its foreign aid program to gaining concessions on exploiting natural resources. Its state-owned companies, supported by access to cheap (if not free) credit from Chinese banks, often outbid foreign competitors in securing contracts and exploration rights. It is willing to take excessive financial and security risks and encourages its companies to venture into areas, such as Sudan, Zimbabwe, and Congo, where their Western rivals don’t dare to tread.
But in executing this strategy, the Chinese have found themselves facing a fundamental dilemma: it’s a rising power with global economic interests, but no global power projection capabilities to protect these interests.
On most occasions, to be sure, China can free-ride on the security provided by the West, especially the United States. For example, with the U.S. Navy patrolling the sea lanes and keeping a close watch on conflict-prone areas, China gains free protection. One of the most illustrative cases is China’s $3 billion investment in an Afghan copper mine, which is protected by the U.S. Army.
Yet, free-riding has its limits. There are areas where conditions are so unstable that even Uncle Sam doesn’t want to risk the lives of its soldiers. Sudan is one such country.
If China insists on going it alone in its quest for resource security, its only option for protecting its sprawling interests is to develop commensurate power projection capabilities. This will be both costly and, more worryingly, cause anxieties among its neighbors and Western countries since it will entail sustained and massive increases in China’s military spending. This option, which will take years, if not decades, to implement, won’t meet the more immediate needs of providing security for Chinese economic interests in dangerous places anyway.
Without its own power projection capabilities, China will have to do one of two things.
First, it can simply do nothing and let itself be literally held hostage by the geopolitical and security risks prevalent in the regions where it has made valuable investments. This is hardly an attractive option because China risks losing its investments and its government, which has been subject to fierce criticisms in the Chinese cyberspace after the kidnapping of Chinese workers in Sudan, will appear weak, incompetent, and helpless.
Second, China can alter its existing go-alone strategy and join the West in ensuring collective resource security. This requires a fundamental change in Beijing’s mindset. (And obviously, similar adjustments are needed in the West as well.) Instead of viewing the quest for resources as a zero-sum game, China will see that its interests are closely linked with those of the West, and that it can make its investments and operations in far-flung regions more secure by pooling its efforts with those of the West.
Such a cooperative strategy will likely yield more benefits than China’s cut-throat competitive strategy. On the financial front, China won’t be wasting money trying to outbid its Western rivals (who will be partners). Its development aid will be more aligned with the goals of seeking conflict resolution and improving governance, rather than with obtaining competitive advantages in securing contracts. By partnering with the West in making resource-rich developing countries more stable, China will in fact reduce the risks of its investments and economic interests there. Even in crises such as the ongoing hostage drama in Sudan, a China in close cooperation with the West may seek direct assistance from its partners that have the requisite military capabilities in these areas. So for China, shifting its current strategy will be truly win-win.
To a Chinese leadership steeped in realpolitik and paranoia about the West, this proposal may sound naïve. But the alternatives are far worse. If Beijing stays on its present course of seeking resource security at any cost, it will run into crises far worse than the one they have just encountered in southern Sudan.....
By Steve LeVine
The history of sanctions and smuggling suggests that China and India will be big winners from oil sanctions slapped on Iran -- among just a few remaining large buyers of Iranian crude, they will enjoy immense bargaining leverage with Tehran, and pay far lower than the global crude oil price. But how much will that discount be?
If a crisis faced by Canada is any clue, Iran's crude oil revenues -- $73 billion in 2010, accounting for most of the state budget -- are going to plunge: In Canada's case, a transportation bottleneck into the United States is forcing local producers to sell their crude at a 33 percent discount, the lowest price in some four years, write the Financial Times' Gregory Meyer and Ed Crooks. Specifically, we are talking a price of about $67 a barrel, compared with nearly $100 a barrel for the U.S. traded blend, called West Texas Intermediate.
(Before you round up a bunch of friends with pickup trucks and head for Hardisty, you'd need to buy a considerable number of barrels to profit from this anomaly. But one would expect deep-pocketed entrepreneurs to be figuring out how to add tanker cars to the rail line.)
Sanctions and bottlenecks are different animals -- the first can result in a seller's inability to legally market his product most places in the world; the second is a purely technical hindrance. Yet in action, they can behave similarly, and -- in the absence of hard data (at least that I have seen) on how much of a discount China, India, middlemen and smugglers are squeezing from Tehran (pictured above, Iranian President Mahmoud Ahmadinejad) -- Canada's suffering is instructive.
Last month, the Obama Administration rejected expansion of the Keystone Pipeline, which would have carried an additional 800,000 barrels a day of crude from Canada's oil sands to Houston. But, while that decision (likely to be reversed after the U.S. presidential election, regardless who wins) contributes to an atmosphere of uncertainty -- the nourishment of oil speculators -- it is not the specific reason for the bottleneck: Even if the expansion had been approved, it would not come on line for at least another year.
Instead, the trouble is that there is already a glut of supply, and too few ways to get it to refineries. What you have is a combination of booming Canadian oil production -- up by about 10 percent over the last year -- that is bumping up against rising North Dakota crude. In all, western Canada and North Dakota are producing some 2.5 million barrels of oil a day, a volume that continues to grow.
For some months, experts have suggested that conventional land transportation -- railroad cars, tanker trucks and alternative pipelines -- would manage to pick up the slack. But they are wrong. Producers do not know what to do with their crude. There is "full storage in Alberta [and] maxed-out truck and barge," Deutsche Bank oil analyst Paul Sankey told clients in a note yesterday.
If you look at prices, the transportation trouble actually goes back to the beginning of December, when the Canadian blend went from selling at an $11-a-barrel discount to West Texas Intermediate to an approximately $37 discount this week.
The bottleneck has attacked not only the select Canadian crude, but caused a chain reaction and forced down the price even of West Texas Intermediate. Residential and industrial consumers will not weep. Neither will China and India. But Iranian leaders might.
By Robert M Cutler
MONTREAL - Canadian Prime Minister Stephen Harper in Beijing this week signed with Chinese Premier Wen Jiabao a declaration of intent for a Foreign Investment Promotion and Protection Agreement (FIPA), after 18 years of negotiations between the two countries. Separately, a US$1 billion fund will facilitate Chinese investment in Canadian resource companies.
Under FIPA's terms, Canadian mining companies would acquire legally binding rights and obligations in China, while Chinese investment in Canadian industries such as coal, iron ore, and potash would be likewise facilitated. The agreement, one of several reached this week, will enter into force following legal
review and ratification by the respective governments.
Chinese state-owned enterprises invested US$5 billion in Canada's resource sector in 2011 alone, nearly one-third of the nearly $18 billion they are reported to have spent buying oil and gas companies worldwide last year.
The Canadian side is hopeful that the FIPA with China will promote a better equilibrium in the balance of trade, as China has become Canada's second-most important trading partner after the US. In 2010, Canada's trade deficit with China was US$29.7 billion out of a total trade turnover (imports plus exports) of $54.7 billion.
The FIPA is not a full free-trade agreement - Canada has FIPAs in force with two dozen countries and is negotiating with nearly a dozen others - but the two sides this week made diplomatic noises about their interest in exploring the feasibility of one. Given the nearly two decades required to negotiate the FIPA, one should not anticipate a free-trade agreement anytime soon.
The FIPA is intended to give Canadian companies more protection against discriminatory and arbitrary practices and stabilize, or at least make predictable, their business environment in China. In practice, it is hoped that it will facilitate the implantation into China's economy of small- and medium-sized Canadian businesses that cannot afford to take big risks. The FIPA will not supersede Canada's existing foreign investment regime, so acquisitions and investments by Chinese firms in Canada will still be subject to review by Ottawa.
China at present accounts for 6% of Canada's world trade, and although Canada is even a smaller fraction of China's, the doubling of the level of bilateral trade in just two years has vaulted Canada into the list of China's top 10 trading partners.
Harper with his visit to China aims to diminish Canada's dependence on trade with the United States and follows President Barack Obama's decision not to build the TransCanada Keystone XL pipeline, which would have carried petroleum from Canadian oil sands in Alberta province to existing refining facilities on the US coast of the Gulf of Mexico.
Canada's oil sands are the third-largest crude deposit in the world, estimated at 170 billion barrels. The US State Department blocked approval of the pipeline on the pretext of insufficient time for environmental review. Observers of American politics attribute the decision to Obama's need to shore up support among left-of-center members of the US electorate, with a view towards the presidential elections in November this year. He has come under criticism for rejecting a jobs-producing project and forcing America's most faithful and dependable trading partner to seek other markets.
Canada is considering building the "Gateway" pipeline to carry crude from Albert to the Pacific coast in British Columbia, whence tankers could take the oil to China. The consultation and decision process will still take years, and the Keystone decision could be reversed should a Republican become president next year. Nevertheless, Harper has declared that "Canada's national interests" require the country to diversify its foreign trade, regardless of the ultimate fate of Keystone.
The Keystone decision is not at the origin of Canada's search for trade diversification but may accelerate this. As recently as 2000, trade with the US represented 85% of Canada's total international commerce. At the beginning of the present decade, that figure had fallen to slightly under 75% and it is projected to decline to roughly 67% by the end of the decade.
This evolution reflects, more than anything else, the creation of large middle classes in China itself and in numerous formerly "underdeveloped" countries across the world. International demand for Canada's raw materials, including industrial and precious metals, has increased as the now more affluent members of those population strata build houses, buy jewelry, and generally approach consumption profiles once, and not even two generations ago, achievable only in the industrially developed West and the Cold War-era 24 members of the Organization for Economic Cooperation and Development (OECD).
The FIPA declaration of intent was not the only document signed in Beijing between the two sides in the course of Harper's still ongoing five-day visit. Others covered the aviation, agriculture, energy, finance, telecommunications and science and technology sectors. A bilateral tax treaty dealing with double taxation was also agreed.
These general diplomatic and political agreements do not include a large number of particular cooperation agreements signed with specific Chinese firms by the over three dozen Canadian industry leaders who accompanied Harper to Beijing.
Notable among these is memorandum of understanding (MoU) between the large Canadian investment bank Canaccord and the Import-Export Bank of China to create a "Canada-China Natural Resource Fund" in order to facilitate Chinese investment in Canadian resource companies. The MoU calls for the fund to be capitalized to the tune of $1 billion in the first instance.