China Invests in Canada’s Alberta Oil Sands
By Tai Wei Lim

China Invests in Canada’s Alberta Oil Sands

Oct. 11, 2017  |     |  0 comments


China’s major investment in Canada’s energy sector, particularly the Alberta oil sands, marks China’s continuing diversification strategy away from overdependence on Middle Eastern crude oil. Since its mini oil crisis in the first decade of 2000s, Beijing has been diversifying its energy sources in terms of fossil fuel suppliers, renewables, hydrocarbons, and new non-traditional sources of energy.


China’s State-Owned Enterprises (SOEs) have been fanning out globally for this purpose and have set their sights on the Alberta oil sands, even at a time when oil prices are comparatively weaker due to the shale oil revolution in the US, and stable prices promoted by Organization of the Petroleum Exporting Countries (OPEC). While Sinopec, China National Petroleum Corporation (CNPC), and China National Offshore Oil Corporation (CNOOC) are making headways into investing in Alberta oil sands and tar, Chinese investments are facing a number of factors hindering their further progress in oil sands development.


Under a previous administration, Canada has placed restrictions on foreign SOEs in relation to purchasing controlling stakes in Canadian oil sand companies and firms. Environmental non-governmental organizations (NGOs) and groups are also resisting investments made by Canadian and foreign companies — including Chinese firms — due to the potential environmental damage caused by such investments. In 2015, articles in China’s state-owned media cautioned against Chinese investment in oil sands projects in Alberta due to soft prices, the lower demand for oil extracted from the tar and sands, market volatility, the weaker financial results of these companies, surplus labor and manpower costs, and the non-optimal integration of Canadian operations into the purchasing parent Chinese SOE companies. In addition, China is in the midst of revamping its economic structure in view of global slowing demand for its manufactured products, the consequently-generated surplus production, its slowing and maturing economy, and a re-orientation for future economic growth based on domestic consumption.


On September 30, 1967, the Great Canadian Oil Sands site, a large commercialized operation of oil sand production, was officially launched north of Fort McMurray, Alberta, in a high- profile public ceremony with a festive atmosphere and public speeches by politicians. This investment was made possible by Philadelphia’s Sun Oil under the stewardship of its Chief Executive Officer J. Howard Pew, and 100,000 Albertan households who had sunk in CAD 1,500 each to buy a bond to finance the facility. Alberta’s then-Premier Ernest Manning announced: “This is a historic day for the province of Alberta, and it is fitting that we are here today to dedicate this plant not merely to the production of oil, but to the continual progress and enrichment of mankind.”


Half a decade later, Syncrude became another major milestone in Albertan oil sands and tar developmental history. Founded in 1973 as the first large-scale project of its kind in the Albertan oil sands and tar region, Syncrude (which Chinese SOEs targeted for investment in 2010) turns out 350,000 barrels of oil a day — an output that has good potential to be expanded further — with minimal holding-volume of 5 billion barrels that can last decades.


Since 1945, oil has contributed to Alberta’s coffers and the surge in oil sands infrastructure construction has buoyed the state’s prosperity since the early 2000s, with Fort McMurray turning into a gold rush town contributing disproportionately to the national economy. Property prices there have jumped from just CAD27,000 an acre in 2000 to CAD 1,000,000. To trawl back financial benefits for the local community, Alberta Energy, the main corporation that operates oil sands royalty and tenure rules, issues Crown and individual contracts to verify that the people of Alberta receive royalties and rentals for their local development, healthcare, and education needs. Chinese investors who are keen on oil sands and tar investments may have to work closely with the Canadian stakeholders like Alberta Energy and other local community groups to maximize their investments’ returns to the local communities.



Sinopec has invested USD 4.65 billion to purchase a stake in ConocoPhillips Co.’s 9 percent share in Syncrude Canada Ltd’s oil sands projects.


Alberta’s oil sands are the world’s 3rd largest proven crude oil reserves after Saudi Arabia and Venezuela. The tar sands are a 50,000 square-mile pool of heavy crude oil with 2 trillion potential barrels of recoverable oil located under strata layers of muskeg and surface forest in northern Alberta. Oil sands cannot be used immediately, so crude oil has to be extracted from the tar sands through a series of steps. From the oil sands, bitumen is taken out from open pits along with sandstone, sand, clay, and water, and is processed to reduce its viscosity before refining. In Alberta, conveyor belts transport the sands for processing at the Suncor tar sands near Fort McMurray. According to government projections, oil sands output is projected to increase from 2.3 million barrels per day in 2014 to 4 million barrels in 2024.


Due to a decrease in interest in the oil sands from the peak, Canadian Natural Resources has revealed that its holdings of oil sand leases has dropped by 46,000 hectares between 2014 and 2016. As of January 2015, Chinese SOEs like CNOOC, CNPC, and Sinopec have made investments of USD 53 billion in Canada, with 78 percent in the energy sector; this has attracted Alberta which faced a shortfall of CAD 7 billion in 2015. However, Chinese investments face the scrutiny of Canadian authorities which have revealed new regulations to stop foreign SOEs from having dominant controlling stakes in the oil sands after a CNOOC-Nexen deal.


CNOOC is not the only major Chinese player interested in Canadian assets. Another Chinese SOE, Sinopec, has invested USD 4.65 billion to purchase a stake in ConocoPhillips Co.’s 9 percent share in Syncrude Canada Ltd’s oil sands projects: the first Chinese SOE deal of its kind. Before the Syncrude deal, Chinese SOEs only acquired stakes in projects or minority shares in oil sands/tar firms but not on the same scale as the Syncrude deal made by Sinopec. The Syncrude deal complements Sinopec’s earlier 2008 acquisition of a 40 percent share in the proposed Northern Lights project north of Fort McMurray which was subsequently increased to 50 percent in partnership with France’s Total SA.


In the past, projects that did not exercise caution in their environmental integrity were confronted by various environmental and community groups. For example, a major Canadian pipeline manufacturer was targeted by environmentalists and Native American groups that resisted its Gateway pipeline project which had intruded into a natural green area. In addition to NGOs and local community groups, political opposition has also arisen from Canada’s environmentally-conscious political parties. In spring 2014, a left-leaning state government discontinued 40 years of Conservative Party control in Alberta and this placed its Keystone XL pipeline project in jeopardy as the Conservatives had traditionally fought against higher greenhouse gas emission standards in the oil sands for their pet project.


By 2017, the Albertan government has imposed a quota of a 100-megaton yearly limit on emissions from the oil sands (currently estimated levels as of March 2017 stands at about 70 percent of this maximum quota) with additional emission taxes in the pipeline, although the Canadian Energy Research Institute has argued that the use of solvents to manufacture bitumen in wells with minimal or no water and lower energy use can make oil sands output growth more sustainable. To mitigate environmental damage caused by oil sands mining operations, pine trees were cultivated on reclaimed land that were former Suncor tar sands mines within close proximity of Fort McMurray.


A longer-term perspective on the sustainability of Albertan oil sands investments highlights the need to pay attention to the environmental impact of such investments. In this respect, there are incentives for all stakeholders — including Canada’s national and local governments, foreign investors, NGOs, Native American communities, and others — to work together.


References


Austen, I. (12 Oct 2015). Oil Sands Boom Dries Up in Alberta, Taking Thousands of Jobs with It. The New York Times.


Government of Alberta (n.d.). "Oil Sands". Retrieved from http://www.energy.alberta.ca/OurBusiness/oilsands.asp


Healing, D. (19 March 2017). Alberta Oil Sands Production Outlook Bright Despite Gloomy Headlines. CBC News.


Johnson, T. (29 September 2017). The Oil Sands at 50: Will They Still Be Producing in 100 Years? CBC News.


Ralston, M. and McCarthy, S. (26 March 2017). China’s Big Move into Alberta. The Globe and Mail.


Taylor, A. (25 Sept 2014). The Alberta Tar Sands. The Atlantic.


Xinhua (30 April 2015). Be Prudent about Canada’s Energy Sector, Warn Experts.

China Daily.

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