Syncrude operations near Fort McMurray, Alta.MARK RALSTON
Ottawa says it will use its regulatory power to stop Chinese state-controlled Sinopec from exporting raw oil sands bitumen and refining it abroad to take advantage of looser climate-change rules.
Sinopec - China's largest refiner - has agreed to pay $4.65-billion (U.S.) to acquire ConocoPhillips' 9-per-cent stake in the Syncrude oil sands project. Under the Syncrude partnership agreement, the seven owners each receive a portion of production to be marketed as they see fit.
But the Harper government vowed during the 2008 election campaign that it would prevent any company from exporting raw bitumen - unprocessed oil from the oil sands - for upgrading elsewhere in order to capitalize on lower greenhouse gas emission rules. Yesterday, the government stood by that promise.
"The government is committed to implementing our campaign pledge," said Andrew MacDougall, a spokesman in the Prime Minister's Office.
It remains unclear how the government would enforce such a policy, particularly in light of a plan by Calgary-based Enbridge Inc. to build a pipeline to the West Coast to facilitate bitumen exports to the Pacific Rim. One possibility would be to impose an export tariff on bitumen shipments to countries with weaker environmental standards.
The issue is one of several that could arise as Ottawa gets set to review Sinopec's proposed acquisition, which triggers a foreign investment review because the ConocoPhillips shares are held in a separate corporation.
Ottawa must also determine that Sinopec, a major player in China's drive for energy security, will run its Canadian operations on a commercial basis.
That includes with regard to where it exports and where it processes raw materials. It has approved acquisitions by other Chinese state-controlled companies under similar rules.
In the House of Commons yesterday, New Democrat MP Nathan Cullen accused the Harper government of flip-flopping on its election pledge.
"The Prime Minister is breaking his own fundamental promise not to export raw bitumen to countries with lower environmental standards. He is exporting raw resources and Canadian jobs," Mr. Cullen said.
The government has responded that the Sinopec deal will be subject to Investment Canada review to ensure it is of net benefit to Canada, including a review of its state-owned status.
In the short term, Sinopec has little opportunity to sell its share of Syncrude production outside Canada or the U.S., since there is only modest pipeline capacity to the West Coast.
Analysts say Enbridge's proposal pipeline to Kitimat, B.C. would open up new markets, and serves as a major drawing card for Chinese and other prospective Asian investors in the oil sands.
While Chinese firms have a strategic interest in refining crude in their home market, current oil sands producers are increasingly opting to upgrade in the U.S. rather than Canada in the expectation of higher profits from that strategy.
New Jersey-based analyst Paul Ting said Sinopec, PetroChina and China National Offshore Oil Corp. are central players in Beijing's drive for energy security.
Al three companies have undertaken massive expansion of their refining capacity in China and are scouring the world for crude supplies to feed those plants, while also increasing imports of refined petroleum products, Mr. Ting noted.
The former senior oil analyst at UBS Securities said China is increasingly worried about security of its energy imports, which are fuelling the country's dramatic growth and improvement in living standards.
"They want to get oil any way they can, whether it is crude or [refined] product," he said. "I think what you see in the oil sands is an extension of their strategy - they've bought a lot of reserves recently and expanded their refining capacity."
Proponents of Chinese investment in the oil sands say Sinopec and state-controlled PetroChina now operate much like any other multinational oil company, selling their oil into whatever market provides the best return. Both companies have significant public share ownership, and trade in Hong Kong and New York.
Wenran Jiang, a China expert at University of Alberta, said Sinopec is more interested in earning a profit from the Syncrude investment than shipping the crude to China. As Asia's biggest refiner, Sinopec is particularly vulnerable to rising crude prices, and the investment in crude production allows the company to offset the squeeze on refineries by earning profits when crude prices rise.
"It won't surprise me if Chinese come in with bigger investments," Mr. Jiang said. "The question is, how the Canadians receive them, rather than whether the Chinese will come."