Ask somebody on the streets of Shanghai what they envisage when they think about Canada and you’ll likely hear “mountains” or “beautiful scenery.” These are the features that have made the country one of the most popular tourism and immigration destinations among Chinese.
Speak to a dark suited executive inside his office at one of the cavernous complexes that house China’s state-owned oil giants in Beijing, and you’ll hear an equally enthusiastic response to Canada’s physical assets. But he’ll more likely have drilling in mind than skiing; the North American nation is one of the biggest energy producers in the world.
These contrasting images of Canada collide in a part of the country that is home to the Western Canadian Sedimentary Basin. The basin stretches across an area of western and northern Canada larger in size than South Africa and is one of the world’s most valuable deposits of natural resources. Stretching over part of the basin are the Rocky Mountains, a skier’s paradise.
Developing and exporting the hydrocarbons in this area, and across the rest of Canada, is vital to the country’s economic future, a growing legion of economists, politicians and oil executives say. They argue that the energy industry is an integral source of growth as well as a major employer and creator of new jobs. Yet exploiting the full potential of energy resources is not easy.
Canada’s traditional oil and gas reserves are running out. Now, energy firms and the government are focused on pulling oil sands and shale gas out of the ground; these are referred to as “unconventional” assets because they require new and advanced drilling techniques to extract. But they are often found in remote locations and are hugely expensive to develop. Ottawa lacks the funds to pay for everything that is needed.
Step in China. The world’s biggest and fastest-growing consumer of energy has set its sights firmly on Canadian assets. Its state oil companies have the cash to throw at wells, pipelines, ports and refining facilities. Even so, there is no guarantee that everything will work out. Regulatory obstacles are slowing progress and low global energy prices could scare away investment.
Buried wealth
Canada has a proud seat at the top table of the current global order. It is among the G8 group of major economies and a long-term member of bodies such as the Organization for Economic Cooperation and Development and the International Monetary Fund. But unlike its developed world peers energy accounts for an outsized share of GDP.
Unbeknownst to many outsiders until recently, Canada is an energy player on par with Russia and Saudi Arabia. It holds the world’s third-largest proven reserves of crude oil and has massive amounts of natural gas. This journey started in 1947 when the Leduc No. 1 well struck oil in the Western Canadian Sedimentary Basin situated underneath Alberta province.
For the past six decades conventional oil and gas have been the main source of energy production. Those resources are slowly coming to the end of their commercial life. Government and industry are looking to unconventional assets to take on their role in powering the economy.
Of the 173 billion barrels of oil reserves in Canada, 168 billion are oil sands; these are mined in huge open-surface pits or drilled from beneath; the complexity in extracting them typifies unconventional energy. By around 2030, oil sands production could more than quadruple from 1.3 million barrels a day to 5.4 million, says a statement on the website of Imperial Oil, the second-largest integrated oil company in Canada and a leading developer of oil sands.
Oil sands already account for more than half of total Canadian oil output. The Canadian Energy Research Institute (CERI) claims that almost every community in Canada has been “touched” by the economic benefits of the oil sands. The institute, which has close ties to energy companies, forecasts that over the next 25 years oil sands will provide almost of half of the one million jobs in the domestic oil industry and contribute an aggregate US$1.5 trillion to the economy.
Although Canada does not rank in the world’s top 10 nations by proven natural gas reserves, it is the second-largest producer of shale gas after the US. Shale gas, which is trapped in pockets between deeply buried rocks, is the most significant development in global energy in decades; it accounted for approximately 15% of total Canadian natural gas output in 2012.
Yet despite their undoubted economic value, these new energy sources have their critics.
Oil sands production pollutes the air while fracking, as the process through which shale gas is extracted is known, is considered harmful to the environment. The energy industry, government and environmental groups are locked in a bitter battle of words over how much harm is caused. Activist Noam Chomsky last year said that through its shale gas and oil sands policy the Canadian government is trying to “destroy the environment as fast as possible.”
Step up, China
What troubles the Canadian government more than environmental activists, however, is a lack of money to develop these new energy resources. Often found in remote and harsh locations, they are technologically difficult and more costly to extract than traditional deposits.
Getting this oil and gas to the surface is also only a part of the wider picture. In order for Canada to fully realize its energy potential, industry advocates note, it must be able to ship that output to a range of overseas market and not just the US. Almost all Canadian oil and gas exports are pumped by pipeline southwards to its North American neighbor.
“One of the challenges we [Canada] face, however, is the need to get our crude oil and gas to tidewater in order to export it, otherwise we risk a stranded asset and a huge loss of revenue,” says a note on the Canadian website of consultancy PwC. The country lacks transport networks to move oil and gas from fields to the west coast from where it would be exported; there is also a huge shortage of facilities that liquify gas to load on to ships.
Diversifying into new markets, particularly in Asia, is an urgent task as the US switches from being the world’s largest importer of energy to a potential exporter, thanks to its own unconventional energy boom. Exports to there are projected to decline in the coming decades.
Asian governments are already knocking at the door. Indian and Malaysian state energy companies have invested in production assets in Canada, while Japan and South Korea are desperate to open up their import channels. This is good for Canada as Asian consumers pay some of the highest prices for natural gas anywhere in the world.
Beijing has established a strong foot on the ground in Canada. In late 2012, state-owned China National Offshore Oil Corporation bought Toronto-listed Nexen in a US$15.1 billion deal. There have been other transactions: Chinese companies have sunk more than US$33 billion into Canadian energy assets since 2009, according to Dealogic. In the 2007-2013 period, 28% of all overseas investment into Canadian hydrocarbons and 38% into oil sands came from Beijing.
“China is an important source of funding just as much as Canada is an important source of necessary natural resources for China,” Arlene Kish, senior Canada economist at IHS Global Insight, told China Economic Review. “China has already invested in Canada’s oil sands so further investment would be welcome as well.”
Both Ottawa and Beijing are hoping for quick progress. “China would like that [energy exports from Canada] to become a possibility as soon as possible. But
the question is how can that become possible?” said Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University. “One opportunity is to invite Chinese companies to build infrastructure. Why not? That will speed up the process a bit.”
Benefits spill over
Politicians in distant capitals are not the only ones waiting for action. Fast-growing communities in Canada’s energy provinces are hoping the good times can continue. In this country of 35 million people, energy accounted for up to 18% of nominal GDP in 2012 and is responsible for up to 1.8 million jobs, according to Natural Resources Canada, a government department.
Domestic energy production has doubled since 1980. Many of the benefits have been reaped by western provinces such as Alberta and Saskatchewan that sit atop of the Western Canadian Sedimentary Basin. Local government data show Alberta has been the fastest growing Canadian province for 20 years; it had the highest per capita GDP of any region in North America in 2012 and some of the lowest levels of unemployment nationwide.
“While the current state of affairs is impressive, we believe that the best has yet to come [for Alberta],” Robert Hogue, senior economist with Royal Bank of Canada, wrote in a research report at the end of last year, noting that natural gas will be an important factor in this.
Neighboring Saskatchewan has mostly seen its emergence connected to mining, but also has energy deposits thanks to the basin. Oil production there is second only to Alberta. These two regions are expected to see more than 76,000 new jobs in oil and gas by 2022 and 78,000 mining jobs by 2021, Natural Resources Canada projected in a report last August.
At the right price
Nobody can say for sure when Canada will open up its energy export channels. Public comments from economists and industry executives put the earliest figure at 5-7 years. That could be realistic after the National Energy Board approved liquid natural gas export permits for four planned projects on the Pacific coast to facilitate shipments to Asia last December. Still, pipelines have to be built to move oil and gas to port – a regulatory battle surely awaits.
Factors outside of control of bureaucrats in Ottawa could also hold things back. Unconventional energy development is expensive anywhere, even more so in Canada where labor and general business costs are high. If global energy prices decline by even a little from their current levels developing Canadian energy might no longer be commercially viable for investors.
“Declines in energy prices is the biggest threat to investment,” noted Kish at IHS. “When energy prices declined during the recession investments in the oil sands were put on hold for at least a year or longer.” Xiamen University’s Lin cautioned that Chinese energy companies would have to factor in price risks when assessing their infrastructure investments in Canada.
Yet considering the huge and growing energy needs of emerging markets, the chances of a collapse in global energy prices are slim. Canada is also an attractive business destination that understands it must court foreign capital. So while middle class Chinese think of skiing trips to the Rocky Mountains, energy executives will prefer to think about what lies beneath.