OIL SANDS:

Did Keystone XL really drive Canada-China coziness?

This week's bid by a Chinese state-owned oil company to take over a Canadian oil sands crude producer seemed to hand Republicans a perfect talking point for their efforts to fast-track the Keystone XL pipeline: China is already taking advantage of America's delay in approving new heavy fuel imports from its northern neighbor, the GOP argued.

"It's very clear," Sen. John Hoeven (R-N.D.) said yesterday, citing Ottawa's public courtship of Chinese investment after President Obama punted a ruling on the $5.3 billion pipeline until 2013. "Either we're going to develop our resources and work with Canada, or China is going to do it."

But while Keystone XL has motivated Canadian officials to pursue new export markets for their 170-billion-barrel oil sands reserves, energy experts see little evidence to suggest that the controversial pipeline's postponement swayed the $15.1 billion deal that China National Offshore Oil Corp. (CNOOC) hopes will hand it control of Nexen Inc.

CNOOC, forced to withdraw a 2005 offer for Unocal Corp. amid U.S. political pressure, tied its first bond to the oil sands -- specifically, the troubled Long Lake project operated by Nexen -- last summer with a $2.1 billion purchase of OPTI Canada. PetroChina, the publicly traded division of China's largest state-owned oil company, earlier this year bought the last 40 percent of an oil sands project it had controlled since 2009.

"I knew this was happening long before any delay of Keystone," Wenran Jiang, organizer of the Canada-China Energy & Environment Forum and an adviser to the Alberta government, said of the CNOOC-Nexen deal in an interview.

"CNOOC's development strategy here [in Canada] can't be said to be clearly correlated to Keystone, because they've been here longer than Keystone. Even if Keystone is approved, the current pattern is Chinese capital coming in."

That less than 30 percent of Nexen's projected resources are located within Canada, however, did little to stop supporters of Keystone XL from clamoring for its approval as a means to combat Chinese control of Canada's sixth-largest independent oil company.

Republicans on the House Energy and Commerce Committee circulated a Wall Street Journal editorial that described the CNOOC-Nexen match as China's "post-Keystone XL pipeline bid to replace the U.S. as Canada's biggest energy investor and market." In a prelude to the article, GOP aides wrote that "China is happily seizing on President Obama's misguided policies" with respect to oil sands crude.

Yet even if Nexen were to take on more oil sands exploration interests, China still would have a long way to go before catching up to the U.S. energy trade with Canada.

Canadian oil and gas exports to America topped $103 billion last year, according to federal records, or more than six times the $16.8 billion value of total Canadian exports to China. The Asia Pacific Foundation of Canada, where Jiang is a senior fellow, estimated that oil made up 8 percent of that $16.8 billion.

Developing it vs. buying it

The Canada-to-China trade did mark a 27 percent increase over the previous year, however. That trend underscores the most on-the-mark element of Republican concern about the Nexen buyout -- China's eagerness to extract the heavy crude that would run through Keystone XL, with the attendant carbon emissions that alarm green activists, regardless of whether the White House allows the pipeline to Gulf Coast refineries.

China's record-breaking foreign investment proposal in the oil sands is "not so good for the environmental movement, because the Chinese will figure out how to move this oil out, [which] contributes to global warming," said Philip Verleger, a veteran energy economist whose projection that Keystone XL would drive up gas prices is often cited by its critics.

In the absence of pipeline infrastructure, rail is emerging as a viable alternative, Verleger added. "Efforts to slow crude oil pipelines probably will not have much of an impact on slowing the development of oil fields in Canada and the Bakken" in North Dakota, he said.

Despite the rise of rail, developing fuel from Canadian assets does not necessarily mean Chinese consumers will have easy access to the resources. The most promising avenue for large-scale oil sands crude shipment to Asia, Enbridge Inc.'s Northern Gateway, remains mired in intra-provincial Canadian political battles as acrimonious as those that sidelined Keystone XL (EnergyWire, July 26).

Canadian regulatory filings show that Nexen was one of 10 oil companies providing $10 million to help Enbridge navigate the approval process for the Gateway pipeline, which would run west from Alberta to the coast of the liberal province of British Columbia. Still, that contribution would not prevent a CNOOC-owned Nexen from routing future crude through Keystone XL, if it is constructed.

Chinese-controlled oil sands producers likely would see some of their fuel shipped to the United States, Jiang said. "Isn't that good? It's market-oriented. Somebody's putting up money, creating jobs in Canada ... to make the U.S. energy supply more stable."

But pitting China against America in a race for Canadian oil sands fuel remains a potent argument for Republicans in Congress as well as the government of Prime Minister Stephen Harper, who dialed up the volume on his pitch for Asian investment in Alberta's energy sector soon after Keystone XL's permit application was delayed in November.

If anything, the Beijing-as-economic-rival narrative has gained momentum in Washington, its questionable relevance to the oil sands aside, because of Democratic attacks on GOP presidential nominee Mitt Romney as an outsourcer of jobs to China.

"I don't think it's as big a deal as people are trying to make it be," Frank Verrastro, director of the energy program at the Center for Strategic and International Studies think tank, said of the Nexen buyout in an interview.

Existing capacity to bring oil sands crude south from Canada is not set to run dry until 2016, he added, and the boom of domestic oil in the Bakken and Eagle Ford shale plays already is complicating the picture for the U.S. market. "That's not true, that we're forcing Canada and China together."

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