China eyes Canadian oil sands reserves

China is moving aggressively to obtain additional supplies of oil for future use. Its latest focus is Canada and the vast oil sands there.

Enbridge Inc., the pipeline giant, and PetroChina have announced a preliminary agreement to put a new $2.5 billion pipeline on Canada’s west coast.

Pat Daniel, president and CEO of Enbridge, said China’s largest oil company is seeking about half the Gateway Pipeline’s capacity, or 200,000 barrels a day of oil sands crude.

The Gateway would be almost 1,200 kilometers long, taking the oil sands crude from Edmonton, across the Rockies to a deep-water port, either at Kitimat, British Columbia, or Prince Rupert to be exported to Asia and California.

“This is a positive step forward on a project which will have major benefits for Enbridge, for oil sands producers and for Canada, as well as for consumers in China and other offshore markets,” Daniel said.

He said, however, that much still must be done before the pipeline is a reality. Agreements must be negotiated for long-term sales of crude to PetroChina and smaller deals with other shippers to fill capacity on the proposed 400,000-barrel-per-day pipeline.

Though Enbridge believes the pipeline could be in service by decade’s end, that would mean a fast-moving timeline. The company would need to reach agreements with oil sands producers and refiners before year’s end.

It also would have to line up support from community, aboriginal and environmental groups before making an official regulatory filing sometime next year.

China has a large and growing demand for oil to supply its burgeoning economy. Chinese oil companies are the main players in offshore oil business in Southeast Asia and have been seeking other sources to ensure steady supplies into the future.

The move by Beijing is very likely to irritate and agitate the Bush administration which tends to regard Canadian oil reserves as its own entitled supply.

Scrutiny on Northern Alberta oil sands has been growing fast, and they are thought to be the future producers of most of Canada’s crude oil. A long list of projects is due to come online in the near future, and production is forecast to almost double to 2 million barrels per day within 10 years.

Considering the oil sands, Canada has the second-largest supply of remaining oil reserves in the world after Saudi Arabia. Several of the big state-owned Chinese energy companies have been closely watching the oil sands. Earlier last week, China National Offshore Oil Corp. (CNOOC), got a foothold in that sector by buying nearly 17 percent of privately-held Canadian oil sands from MEG Energy Corp. for $150 million.

Brian Purdy, a pipeline analyst with FirstEnergy Capital, based in Calgary, said the initial deal should give Enbridge what it needs to move forward with the project and also sign other smaller deals to fill up the pipeline. “This pipeline obviously shows China’s demand for oil and what they’re willing to commit to,” Purdy said.

Enbridge is one of Canada’s largest energy companies, operating the main oil pipeline carrying Alberta crude to eastern markets. Enbridge also owns the biggest natural gas distribution company, the former Consumers Gas Co., based in Ontario.

The company has several new, multibillion-dollar projects on the drawing board to carry expanding oil sands crude to new markets on both sides of the U.S. as the more conventional oil supplies decline.

A rival pipeline company, Terasen Inc., also is eager to supply oil sands crude to markets in Asia and has been considering expanding its existing pipeline, taking oil from Edmonton to British Columbia’s Lower Mainland.

Purdy thinks Terasen will have a tough time getting commitments from oil producers. “They’re well behind, given this announcement,” he said. “It’s going to be difficult to get that critical mass that they need to justify a project of this size. You don’t go ahead with a $2.5 billion project without a good portion of that capacity tied up before you start,” Purdy said (Globe &

From the April 27-May 3, 2005, issue

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