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Commentary (February 4, 2005)

China Stepping into America's Backyard

Michael Richardson (Visiting Senior Research Fellow, Institute of South East Asian Studies in Singapore)

China's frenetic global search for large supplies of oil-based energy has recently brought it to Canada and Venezuela, which together provide about 25 per cent of US oil imports. While the Chinese foray is not yet taking oil that might otherwise have gone to America, the Bush administration will be watching closely as state-owned companies from China tie up long-term supply deals in its backyard that could threaten its energy security.

Canada and China last month signed a joint Statement on Energy Co-operation in the 21st Century during a visit to Beijing by Canadian Prime Minister Paul Martin. It opens the way for Chinese firms to establish partnerships with Canadian energy companies.

A month earlier, Venezuelan President Hugo Chavez said in Beijing that he had signed new agreements that would allow Chinese companies to explore for oil, set up refineries and produce natural gas in the energy-rich South American country. The deal came amid escalating tensions between Venezuela and the US, as the leftist Mr Chavez vowed to reduce Venezuela's dependence on the American oil market.

Meanwhile, Beijing wants to diversify energy sources for the rapidly growing Chinese economy, as domestic oil output declines and concerns about overreliance on the volatile Persian Gulf grow. Venezuela has the western hemisphere's largest conventional proven oil reserves. It sells 60 per cent of its crude oil exports to the US and is America's fourth-largest supplier. Canada is the largest. But huge deposits of oil sands in Alberta province make up the vast bulk of Canada's total proven crude oil reserves of almost 179 billion barrels.

Oil sands contain black viscous oil. They must be mined and processed before the hydrocarbon content can be burned as heavy fuel oil or refined into petrol and diesel fuels. Until now, the sands have been uneconomic. But with oil prices above US$40 a barrel and likely to stay high, and advances in recovery techniques, the economics of extracting oil from the sands are becoming more attractive. This has caught China's eye.

According to a joint statement issued on January 20, Canada and China have decided to "work together to promote co-operation in the oil and gas sector, including Canada's oil sands, as well as in the uranium resources sector".

But it will not be plain sailing for China in either Canada or Venezuela. Mr Martin's minority government is coming under pressure to safeguard Canadian resources. His Industry Minister, David Emerson, said last week he was concerned that enterprises owned or controlled by Beijing might not be entirely market motivated, and he was looking at how to strengthen the investment law to protect Canadian interests.

Chinese companies have agreed to invest US$350 million in 15 oil fields in Venezuela, along with US$60 million in a gas venture, and to import 120,000 barrels of Venezuelan fuel oil a month. Refineries in China will have to be refitted since most cannot process Venezuela's heavy crude oil. It is also more expensive to ship oil to China than to the US. Mr Chavez is now trying to persuade Panama to accept a proposal to reduce these costs by sending Venezuelan oil by pipeline across the narrow neck of land bisected by the Panama Canal, which can only carry relatively small tankers.

Still, some US analysts are worried. "Every barrel of oil China buys in the Americas means one less barrel available for the US," said Gal Luft, executive director of the Institute for the Analysis of Global Security in Washington. "This means that the US will have to be more reliant on oil from less-stable regions, primarily West Africa, the Caspian and, above all, the tumultuous Middle East."

(Originally appeared in the February 4, 2005 issue of South China Morning Post in Hong Kong, reproduced here with permission.)

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