Northern Gateway blessing gets mixed, muted response in Asia

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In April 2005, the chief executive of Enbridge Inc. flew to Beijing to sign a $2-billion deal with one of China's fossil fuel giants, PetroChina International Company Limited. Together, the companies agreed, they would develop what was then called the "Gateway Pipeline" to send oil from Alberta to Asia.

The following years saw the project fall apart, before being revived and, after a torturous road that seems far from over, given final approval Tuesday by the government of Canada.

But as the 2005 deal made clear Northern Gateway, as it is now known, has always been about China.

Yet Ottawa's blessing, after a review process long enough to span the conception, approval, construction and entry into service of numerous longer pipelines in China, prompted a mixed reaction in Asia, with cheers set against a rising doubt that Canada's oil will even be needed on the other side of the Pacific.

The most vocal supporters were those with most to gain.

"I am very happy about it," said Feng Zhiqiang, the chairman of North American operations for Sinopec, one of the big three state-owned Chinese oil and gas companies. "It's good for Canada, and especially the oil sands industry."

In an interview, Mr. Feng called Canada and China probably "the most complementary countries in the world. Canada has resources, and China has the market."

Sinopec straddles both sides, as Asia's biggest refiner, a major importer of oil to China and an investor in Canada.

The Chinese giant, with 1.6-million barrels per day in global output, holds a 5-per-cent ownership in Northern Gateway, and interests in several Canadian oil projects, including a minority share in Syncrude and 50 per cent of the unbuilt Northern Lights project, a joint venture with Total SA that it first entered in 2005. But investment in Northern Lights has been held back in part by the deflated price of oil sands crude, which has been lowered by the inability of companies to build new pipelines to bring product to market.

"If we use the current oil price in Canada, then this project is marginal," Mr. Feng said. Were prices $10 (U.S.) per barrel higher, it would be a "a very good project. We will invest now."

A pipeline like Northern Gateway would spark a revival in prices, he said. Without it, he warned, at "the current price probably quite a big part" of oil sands reserves "can't be developed."

Given the financial gains that could pour in to Canada from higher oil prices, Mr. Feng expressed confidence that Gateway will eventually be built, despite the threats of legal and human roadblocks that have added uncertainty to the project's fate.

Elsewhere in Asia, however, that uncertainty has created a skepticism that, together with warnings about China's tapering oil demand growth, suggest the pipeline's path forward remains difficult – even in the market that has long been most eager for its crude.

Indeed, an attempt to remake China's energy landscape is pushing demand toward natural gas over oil. In a recently published "World Energy China Outlook," lead author Xu Xiaojie, the former director of the Institute of Overseas Investment Research with China National Petroleum Corp., suggests the country's oil demand will move toward "stability," even as gas enters a "golden age."

Declining domestic crude production mean imports will continue to grow, to 68 per cent of total demand by 2035, up from 55 per cent in 2011. But "there is no immediate requirement for a big amount of oil from elsewhere, especially from Canada," Mr. Xu said. "Much of the oil will be available from the current market, especially from the Middle East – and even from Africa."

Ding Yifan, a senior fellow at a research centre connected to China's powerful State Council, said the country's oil demand growth could halt as soon as 10 or 15 years from now. That would add to the difficulty for new entrants to the market.

"I don't think that Canada will be a major oil supplier to China," he said. "Actually, if you take current world energy resource supply and demand, there is not such an imbalance. There is even more supply than demand."

Other factors work in Canada's favour, including the construction of Chinese refineries built to chew through thick crude, like the bitumen that comes from the oil sands. A fifth of the oil entering Chinese refineries in 2013 was heavy, but the country will need to import substantial new amounts as its own production wanes. "The shortfall needs to be secured from elsewhere and Canada is one such source," said Suresh Sivanandam, a Singapore-based senior analyst with Wood Mackenzie, the global resources sector consultancy.

Wood Mackenzie has forecast China will import 400,000 barrels per day of North American crude, most of it Canadian, by 2019 or 2020 – although it's a forecast with an asterisk.

"The biggest challenge will be whether this pipeline will come at all, given there are a lot of challenges environmentally as well as legally," Mr. Sivanandam said. "However, if it comes, it's going to benefit this part of the world."

The key lies in getting it built. A broad collection of opponents – spanning environmental activists, First Nations and blue collar workers – has pledged to do everything in its power to stop a project seen as too risky to the environment of northern British Columbia, a place teeming with salmon-filled rivers and ocean inlets.

To combat them, Mr. Feng, the Sinopec executive, called on both the Canadian energy industry and the Canadian government to do more.

Oil companies, he said, should engage in "more discussions" to win favour from opponents.

Ottawa, too, should "really let people understand how important pipelines are to the Canadian economy, to the welfare of the people," he said. The vast spiderweb of existing pipelines should also make it clear that people are "overly worried" about environmental risk, he said – although high-profile spills in recent years have accomplished exactly the opposite.

But if government and industry persuasion efforts do not suffice Sinopec, he said, would welcome more active intervention by Ottawa, even if that includes legislation to force the pipeline's construction.

"I don't know whether the Canadian government can do this or not," he said. But if it can, it would "make the project more efficient to build and, finally, will benefit the country."