Sunday, April 24, 2005

Energy Supplies - Good News

Good news on the enery front. The Chinese are planning to increase their energy supplies by building an oil pipeline. In Canada.

Canada is going into the oil sands business in a big way. With China.

CALGARY -- China is looking for deals of any kind or size in Canada's oil sands, a senior Sinopec executive says, and the world's most populous country might pull off a "much bigger" move than this week's small, $150-million investment.

"We are looking for profitable projects," which could include everything from minority stakes to full ownership of oil sands projects, said Hou Hongbin, a vice-president of a unit of government-controlled China Petroleum & Chemical Corp. (Sinopec).
Verrrry interesting.

However, that is not all China is up to.
Yesterday, pipeline company Enbridge Inc. announced a preliminary deal with PetroChina Co. Ltd. for half the supply on the proposed $2.5-billion Gateway line, which is supposed to move 400,000 barrels of oil sands crude to the West Coast for export. Chinese companies have made inquiries about the oil sands for several years and last year visited Alberta with a long list of detailed questions, leading to months of speculation about what sort of moves the giant and increasingly powerful country would make. Enbridge's connection with China had been widely expected.

Mr. Hou said securing oil supplies for his energy-hungry country is China's chief goal. "The more sources of import, the more safe" those supplies are, Mr. Hou said. He added that prices for assets in North America are "slightly high," but the continent's political stability and strong rule-of-law are "one of the most important factors for [China's] investment decisions."
North American stability. A very important factor in China's investment decisions. Rule of law is important. You know. I wonder if this is filtering up to top managemt in China.

Well what are the Chinese really up to? There may be an answer here:
Tuesday’s deal makes CNOOC the first mainland China firm to gain a stake in the industry after visits by Chinese government and oil officials to Alberta over the past year.

“These skills may help facilitate the exploitation of oil sand and shale in China,” CNOOC Chairman Fu Chengyu said in a statement.
So this is a technology buy disguised as a production/transport buy. Very Clever.
Privately owned MEG owns a 100 percent working interest in oil sand leases on 32,900 acres in Alberta, Canada. The holdings are estimated to hold 4 billion barrels of bitumen, a kind of tar, that can be processed to produce about 2 billion barrels of crude oil, CNOOC said.

Current high crude oil prices have prompted Chinese oil companies to consider alternative sources of oil to help meet surging demand.

"Lower operating costs and higher recoveries resulting from recent advances in technologies have made many similar projects economically viable," Yang Hua, CNOOC's chief financial officer, said in a statement.

CNOOC's chairman and chief executive officer, Fu Chengyu, said the skills learned in Alberta would be useful in exploiting oil sand and shale in China.

According to the Hong Kong newspaper South China Morning Post, China's two major onshore producers, China Petrochemical Corp. and PetroChina are also negotiating purchases of oil sands assets in Alberta.
Now I wonder who they are buying from. I have a guess. Who said the future of envirnmentalism was China? I think it was Maurice Strong.

Doesn't Strong have connections with oil interests in Canada and France?

In a word.


Well any way. The good news is that one of the largest oil resources in the world - oil sands - is now being developed.

We are not running out of oil.

Update: 23:51z 25 April 2005

I found this interesting article on the technology and politics of Canada's tar sands.
CALGARY -- Chinese demand for the Alberta oil sands -- the second largest reserve of crude on the planet -- puts the United States in the difficult position of balancing its commitment to open markets with its desire for secure supplies of energy, says Alberta's new envoy to Washington.

"That's exactly what the U.S. is wrestling with," said Murray Smith, the former Alberta energy minister who begins work as the province's representative in the U.S. capital next week. The question, which has been pondered quietly for several years, is likely to burst into the spotlight in 2005.

Enbridge Inc. is pushing ahead with a plan to build a $2.5-billion pipeline from Edmonton to the British Columbia coast, saying that the majority of the oil will probably head to China and that a Chinese company may take a 49-per-cent ownership stake in the line.

The line would carry about 20 per cent of the oil sands' projected daily production in 2010 of two million barrels. At present, oil sands production is about one million barrels, with very little of it going to Asia.
We know oil is fungible. Any new source relieves pressure on demand. And that is precisely what a U.S. Expert says:
"There would be some concerns [for the United States]," said Robert Ebel, head of energy studies at the Center for Strategic and International Studies in Washington, citing the possibility of having to pay more for foreign oil than it would have to pay to get it from Canada. "But, all in all, it would benefit the world market as a whole."

Canada is the No. 1 exporter of crude oil and petroleum products to the United States, which is the world's biggest importer and consumes a quarter of the planet's daily production. China recently became the No. 2 importer, moving past Japan. In 2003, Canada produced 2.39 million barrels of crude a day, exporting almost two-thirds of that -- 1.55-million barrels -- to the United States.

Mr. Ebel said that while Chinese competition for a safe source of U.S. oil isn't great news, the fact that China is diversifying its own supply is important, potentially making the global oil market more stable.

"It's not necessarily a surprise that [China] would knock on Canada's door and take a long look at the oil sands," Mr. Ebel said. "Should we be concerned that some of that oil goes east instead of south? Probably not."
Ah, but there may be a fly in the ointment. First the good news:
The oil sands -- whose reserves of 174 billion barrels rank No. 2 in the world behind Saudi Arabia's -- have the attention of the White House. In 2001, U.S. Vice-President Dick Cheney's National Energy Policy report said "their continued development can be a pillar of sustained North American energy and economic security."

But Canada needs new markets, a government agency here says. In a 158-page report in May on the challenges and opportunities in the oil sands, the National Energy Board said the United States historically has absorbed any additional production of crude oil from Canada. But it concluded that "additional markets will be required to keep pace with oil sands expansion."

China doesn't have much refining capacity for the heavy oil such as that produced from the oil sands, but has significant plans to build new refineries.
So where is the bad news? America hasn't built a new refinery in 30 years. In fact our refining capacity over that time has declined by about 2 million barrels a day. In addition our multiple blends of gasoline make it harder to match supply and demand. You can't ship blends designed for one region to another. Environmental regulations don't you know.

And new refineries? Well they cost a lot more due to environmental regulations and getting all the permits required is not easy. Here is some interesting climate change info along with this report:
The industry forecasts 8 to 10 new refineries will be needed to keep up with demand; each refinery is estimated to cost $2.5 billion and take seven years to complete.

Even if companies wanted to build a new refinery, the environmental burden is huge and the costs are overwhelming. Approval of a new refinery could require as many as 800 different permits and NPRA says environmental regulatory costs over the past decade reached $47 billion.

The lack of slack and flexibility is resulting in exaggerated seasonal shortages and price volatility, putting our energy supply, economy and national security are at risk, says IBD. [Investor's Business Daily]


Anonymous said...

Interesting news M. Simon. So, now between the French and the Canadians we are almost surrounded. I read recently about Mexico's Pemex looking into outside investment. Chinese perhaps?

Luther McLeod

David said...

From a Chinese perspective, it seems rational to invest more in oil sands development and less in US Treasury securities. Even if the return on capital on an oil sands investment project is not all that great at current oil prices, it would provide a very effective hedge against higher future oil prices.