China and US Battle for Control of Canadian Oil Sands


Did a Canadian business deal just derail hopes that the United States could become energy self-sufficient?

Last week, China's state-run oil conglomerate China National Offshore Oil Corporation (CNOOC) has put in a bid to buy Canadian firm Nexen, (which holds claim to a portion of the Oil Sands region in Alberta,) in a $15 billion deal that would see CNOOC pay a 61% premium for shares of Nexen stock. The Oil Sands region is currently driving Canada's economic bonanza, and even though they lie within a foreign country, the Oil Sands are an important factor in projections that the U.S. could wean itself off of “foreign” oil by the next decade. If the Oil Sands products start flowing east rather than south though, these projections of U.S. oil independence get cast very much in doubt.

Critics were quick to jump on the CNOOC offer as the by-product of President Obama's decision to delay approval of the Keystone XL pipeline project, which would bring Oil Sands bitumen (the technical term for the product of the Oil Sands) from Alberta to the U.S. Gulf Coast.  They note that the Conservative government of Prime Minister Stephen Harper began a very public courtship of Chinese energy firms following the Obama administration's Keystone XL decision. Some, like Nathan Vardi of Forbes, go as far as to say that Obama “pushed” Canada into China's arms.

While the Keystone XL decision likely played a part in the CNOOC offer, there are other factors at play. Even when it seemed like Keystone XL would be approved, some in Canada argued for the diversification of their export markets, noting that it wasn't in Canada's best interests to be tied to a single external buyer for their energy product. And if you are planning to diversify the markets for your energy goods than it makes sense to look at the world's fastest-growing energy market – Asia, and specifically China – for a source of potential new clients.

It may also be an overstatement to say that the Nexen deal means the Oil Sands are “lost” to America; less than 30% of Nexen's operations are even in the Oil Sands. And their main extraction site in Long Lake, Alberta, has been plagued by numerous problems since it opened eight years ago.

Bitumen found in the Oil Sands is a semi-solid hydrocarbon. Oil Sands deposits near the surface can be mined, and the bitumen “cooked” out of them. For deeper deposits, like Long Lake, a process called steam assisted gravity drainage – pumping high pressure steam deep into the ground to liquefy the bitumen so it can be pumped out – is used. But this process hasn't worked so well at Long Lake, eight years after drilling started, the site still isn't running anywhere near capacity.

And there are other issues for CNOOC and Nexen. To get the bitumen to China, CNOOC will first need to get it to the Pacific Coast; this means building a pipeline across British Columbia. But the British Columbians aren't crazy about the idea of millions of gallons of bitumen flowing across their province, potentially fouling their pristine forests, and being pumped into tankers on their coast, potentially fouling their pristine coastline. The premiers of Alberta and British Columbia are already at loggerheads over the pipeline, and many of BC's First Nation tribes are bitterly opposed to the idea as well. Some Canadians also do not like the idea of the Chinese taking sole ownership of one of their energy companies or of a portion of their energy reserves; a report in Toronto’s Globe and Mail talked of the Chinese discussing how to “repatriate” their share of the oil sands. It is worth noting here that CNOOC's bid to buy Unocal in 2005 was scuttled after the U.S. Congress voiced their fears over an American energy firm winding up in Chinese hands.

And that brings us back to the idea of energy as a national security asset. Both the U.S. and China are viewing the Oil Sands as vital to their future economic development, while Canada is trying to strike a balance between using foreign money to develop a natural resource, while at the same time not losing control over that resource. Expect more twists and turns from the Oil Sands.