CNOOC Ltd.’s $15-billion acquisition of Calgary’s Nexen Inc. is a “landmark decision” for Chinese state-owned companies taking their place in the global energy market alongside behemoths like the ExxonMobil Corp. and Saudi Aramco, Daniel Yergin says.
Dr. Yergin, vice-chairman of IHS Inc., has been a prominent analyst and consultant in the oil and gas business for decades, and is a prolific writer. His 1990 bestseller, The Prize, was a sweeping history of the global oil industry and garnered a Pulitzer prize. His 2011 book, The Quest, is an 800-page account of the remaking of the energy world.
He serves on the U.S. Energy Secretary’s energy advisory board and was a member of a panel that produced a report on the safety of shale gas development in the United States last year. The Globe and Mail caught up with him Wednesday in Toronto, where he addressed a meeting of the Canadian Association of Petroleum Producers.
What is your reaction to the Canadian government’s approval of the CNOOC-Nexen deal?
This is a landmark decision for the Chinese companies because it really reflects a very strong commitment to North America, and it comes at a time when China is reducing its imports of Iranian oil. So this reflects a view of looking toward North America as being an important source of oil for China’s economy and its energy security.
I was in China in September … and I could see how large this loomed for the Chinese oil industry and Chinese decision makers. I think this will be very positive beyond this deal for Canada’s relations and economic connections to Asia.
How do you think Chinese energy investment in North America is viewed in the United States?
The U.S. is asking China to reduce its imports of Iranian oil and reduce its investments in Iran. So, it’s a two-way street. Why wouldn’t we want Chinese capital invested in the U.S. generating value in the United States? It’s still a very small share of a very large industry. The overall relationship will be better if this kind of interdependence exists.
Will Ottawa’s decision on Nexen hasten the day when a Chinese SOE can make a major acquisition in the United States?
At this stage I would still expect it to be more in terms of direct investment rather than acquisition. There’s still the memory of the Unocal situation [when CNOOC encountered political hostility in a failed takeover attempt] that will be there for a long time.
There has been much discussion of the competition between market capitalism and state capitalism in the global energy market. How do you see state-owned enterprises?
The Chinese companies are in a continuing process of evolution. They started off as branches of the ministry and … have gone through quite a process of evolution and it is one that will continue. The acquisition of Nexen will continue the evolution of CNOOC as a company.
But they do have their responsibilities to China and the Chinese government and also their responsibilities to the shareholders, and it’s a daily challenge. What I have observed of these companies is that they have become increasingly commercial organizations.
The Canadian government has made much of the fact that the oil sands represent 60 per cent of oil resources open to foreign investment. Where do the oil sands stack up in terms of an international resource?
A couple of years ago, the Canadian oil sands stood out as the North America resource, but now there is a competitor which is tight oil. U.S. oil production is up by 25 per cent since 2008 … and then there are these big gas discoveries. So you see capital moving in those directions.
The oil sands is an immense resource and you know where it is, but it is also higher cost. Right now, the big question about oil sands is not the technology or what is do-able, it is concern about access to markets and can the logistics keep up with the potential new production. That’s the No. 1 question right now.
What impact will declining U.S. oil imports have on Canadian producers?
The notion of U.S. energy independence is very unlikely. What it will be is less dependent. But even to be less dependent, Canada is going to be a big part of it and you have to look at this re-balancing of the world oil market in the North American context, not in a U.S. context. It really is a partnership between the U.S. and Canada.
Have projections of falling U.S. demand been overstated?
We do think the U.S. has reached peak demand. Demand is going to go down … There are so many assumptions about demand. But we do know it is going to go down, a) because cars are going to get a lot more efficient, and b) because of demographics [with slower population growth and an aging population].
What about the environmental risks to the North American energy boom, especially fears about fracking?
There are a series of environmental issues that need to be managed – waste water, local air pollutions and community impact in more densely populated regions. The message is that these are all manageable issues and they require best practices in terms of operations and regulation.
In the last year, the shift has really been to seeing it as not just about energy supply itself, but really what it means for economic development and making the United States much more competitive in the world economy [as a result of low gas prices and security of supply].
Will climate change re-emerge as a top priority in Washington?
It will be back on the agenda in the second Obama administration. From a policy point of view, it is still there but just not called climate policy. Speeding up the retirement of coal plants, automobile efficiency standards, renewable portfolio standards [in the electricity sector] – those are all energy policies but they’re all very much environment and climate policies as well. But there will be no overarching policy emerging from Congress.
And finally, the Keystone XL pipeline? Will the Obama administration approve it?
I think it’s a yes. When the initial decision was made, they did not expect not only the reaction in the U.S., but not much attention or thought was given to what the impact in Canada would be. There’s much more awareness now that this is a very serious issue for Canada.