Sand solutions

Early in the next decade, China may get its hands on the Holy Grail for oil extractors – Canada’s vast oil sands. But before Beijing can consider its energy prayers answered, much needs to be done to get the oil flowing.

A proposed coast-to-interior pipeline between Kitimat and Edmonton will eventually have a capacity of 400,000 barrels per day, with at least half of this intended for China, said Pat Mohr, vice president of Scotia Economics, a think tank linked to Scotiabank.

This means that Canada, with export capacity of 20 million tons per year, might become the third largest oil exporter to China, after the Middle East and Russia.

Money matters

One of the challenges is profitability. The Alberta province oil sands are the second-largest proven oil reserves in the world at 178.4 billion barrels but they are made up of bitumen, a heavy and viscous form of crude that is difficult to tap and expensive to exploit. Extraction involves injecting steam into the oil sands to pump up the bitumen.

Given these technical difficulties, Mohr believes extraction costs will only be met once the price of oil consistently tops US$55 a barrel.

That said, the sheer size of the reserves could prove detrimental to oil prices, particularly if most of the oil goes to the US. New pipelines to the US Midwest and a mammoth 3,000-kilometer connection to refineries in Houston could pump enough crude to depress oil prices. Therefore, Canada needs another big customer to keep the balance. Enter China.

According to a BP study, China’s oil consumption has been growing 7.4% a year over the past decade, but its production has grown at just 1.5% per year.

“China’s imports of oil are likely to climb to 60% of consumption early next decade, which is similar to US levels,” Mohr said at a recent conference in Shanghai. “In the meantime, Canada needs alternative market outlets, so exporting [from the] oil sands to China is a win-win trade for both sides.”

For China, a deal with Canada represents an opportunity to diversify away from the Middle East, Russia and Africa – which accounts for 70% of oil imports – and hedge geopolitical risk.

Crude from the Venezuelan Tar oil sands is similar to Canada’s and, although easier to extract, it hasn’t been efficiently exploited. Twenty years ago, many thought extraction would be justifiable once the price of oil topped US$30 a barrel but efforts have been hampered by social instability, bouts of privatization and endemic corruption.

According to an oil industry executive, the problems experienced in Venezuela are pushing oil extractors to Canada.

Reassuring Washington

It is still unclear, however, whether North America will ultimately prove to be a secure source for China.

US fears about China’s aggressive oil search loom large so, even if Canada overcomes the technical challenges, it may still have to work with Beijing to craft a political protocol acceptable for Washington.

“By strategic arrangement, Alaskan oil has not been exported to Japan, once accused of unfair trading practices – much as China is accused today,” said Yashiro Masamoto, a former Exxon executive, chairman of Shinsei Bank, Japan, and a non-executive board member at China Construction Bank.  
As part of a push to secure further access, Chinese corporations have been considering investing in Alberta. However, progess has been slow.

China National Offshore Oil Corp, for example, entered into a bitumen project with Meg Energy but progress has been limited to the acquisition of technologies. A potential plan to sell an equity stake in an oil sands pipeline to a Chinese company has yet to be signed.

China’s slow and careful moves in Alberta could suggest a movement towards a more open market approach under which companies don’t necessarily have to buy equity stakes in oil interests to secure supplies. At the end of the day, though, the oil will go to whoever pays the most.