Oil Sands For Sale

How should we respond, if, make that when, China tries to buy up Alberta’s oil sands?

By David Ebner

So, tomorrow morning, or maybe a cold, crisp morning next February, or a blazing summer morning the year after next, you wake up. You’re in downtown Edmonton. Or in suburban Calgary. Or you’re walking to work in Ottawa, to Industry Canada or the Department of Foreign Affairs.

The news alerts buzz on your phone, the headlines are everywhere: China’s Sinopec—state-owned and the seventh-biggest corporation in the world—has made a $55-billion bid to buy Syncrude Canada, the country’s largest oil sands mine.

Unlike BHP Billiton’s failed $39-billion hostile bid for PotashCorp of Saskatchewan in 2010, Sinopec’s offer is friendly. The company already has a small stake in Syncrude. And savvy Sinopec, knowing that China’s biggest-ever foreign acquisition would stoke raging and largely inchoate angst from citizens of every stripe—nationalists, capitalists and socialists from Edmonton to Ottawa—has a bucket of promises: more money for jobs and environmental technology, assurances this isn’t just about locking up oil for the world’s No. 2 economy.

Sinopec is ready. Is Alberta? Is Canada? Albertans, the owners of the oil (just as Saskatchewanites own their potash), don’t actually have the power to refuse a sale. But through their provincial and federal politicians they can use political pushing and moral suasion. The federal government has the final say—a tremendous power rarely wielded and through processes that are at best opaque to foreigners and citizens alike.

The decision would ultimately be up to one man, the Toronto-reared and Calgary-based Prime Minister Stephen Harper. Harper let Inco—the world’s second-largest nickel producer—disappear. He stood up for PotashCorp. He also stood up for MacDonald Dettwiler, the space satellite and Canadarm maker. But he’s not yet faced a defining decision about the oil sands, that massive mess of bitumen, plume of billowing greenhouse gases, and promise of buckets of money for healthcare and education.

When would Albertans, and Canadians, say no? When should they?

Ask a politician: “To single out a particular investment from a particular country sends us down the wrong path,” says Wildrose leader Danielle Smith. “I’m a bit confused about where people think the risks are.”

Ask a billionaire Calgarian, speaking generally rather than to a specific scenario: “There are certain times when the appropriate answer is no,” says Murray Edwards, one of the founders of Canadian Natural Resources Ltd., the country’s second-biggest energy company.

Ask an Alberta cabinet minister: “We’ll cross that bridge if we ever have to,” says Energy Minister Ron Liepert. “One of the things we have to remember is that foreign investment built this province. It’s not something Albertans fear.”

Ask a citizens advocate: “Yes, there would a national security concern over a Canadian oil company being owned by a company controlled by the Chinese government,” says Maude Barlow, national chairperson of the Council of Canadians.

Ask an environmentalist: “It’s about the rules, not the players,” says Jennifer Grant, oil sands program director at the Pembina Institute. “We want to see environmental limits established and enforced.”

Ask a pragmatist: “The key issue is the economic return, rather than ownership per se,” says Roger Gibbins, president of Canada West Foundation.

Ask a financier: “We should be courting the Chinese. They’ll be great shareholders,” says Adam Waterous, chief of Scotia Waterous, a leading broker of Chinese foreign energy investment.

Or ask a lobbyist: “If it were to happen today, it would meet some resistance,” says Yuen Pau Woo, president of the Asia Pacific Foundation of Canada. “But it’s an interesting possibility. It might happen sooner than later.”

The decision would ultimately be up to one man. Harper stood up for PotashCorp. He let Inco go.

The first people in the oil sands were locals. The Cree and Dene used sticky bitumen mixed with gum from spruce and fir trees to waterproof their canoes as they navigated the Athabasca River, which cuts through the sprawling raw oil deposit. The first recorded foreigner in the region was fur trader Peter Pond, an American, in 1778. A decade later, Scottish fur trader Alexander Mackenzie observed “bituminous fountains.” The Geological Survey of Canada quickly reported to Ottawa that it looked like “the most extensive petroleum field in America, if not the world.”

It took decades more to unlock the oil. The first mine opened in 1967, an operation named Great Canadian Oil Sands, owned by Sun Oil of Philadelphia. The next mine was Syncrude Canada, opened in 1978 by four US companies, led by what is now Exxon Mobil. The third mine, opened in 2003, was owned and run by Royal Dutch Shell. It wasn’t until 2009—four decades after Americans created the industry around Fort McMurray—that an actual Canadian company started digging, on land purchased from British Petroleum. The mine, Horizon, was owned and operated by Canadian Natural Resources.

The Investment Canada Act was among the first of Brian Mulroney’s exorcisms of Pierre Trudeau’s legacy. It replaced Trudeau’s Foreign Investment Review Act, which had aimed to limit increasing US ownership of Canadian businesses and which Mulroney considered a radically protectionist instrument, a relic. The new Act became law in 1985 and empowers the government to block foreign investments of “significant” size if they don’t present a “net benefit to Canada.” Unlike Trudeau’s vetting process, the new Act wasn’t particularly concerned about whether assets from fish canneries to nickel mines were owned by Canadians. The question became: Is this good for Canada? Would money roll in, creating jobs for Canadians?

And the money has rolled in, more than quintupling to $562-billion in 2010—while Canadians poured even more, $617-billion, outside our borders. Under Mulroney’s watch, and then under Jean Chrétien and Paul Martin, not a single foreign sale was stopped. More than 1,600 were approved, including the scooping of Inco by Brazil’s Vale in 2006. Tension, however, started building—particularly around Inco, a cornerstone of Canadian industry. For many nationalists and capitalists, it felt like Canada was selling too much.

This sense grew in 2008. A US arms maker, Alliant Techsystems, made a $1.3-billion bid for MacDonald Dettwiler, which had created Canada’s crucial satellite surveillance systems. The deal was deemed not of net benefit to Canada and the Harper government vetoed it.

The PotashCorp saga came next. A battle over the formerly provincially owned company played out through the late summer and autumn of last year. After heavy pressure from Saskatchewan premier Brad Wall, Ottawa said the deal didn’t look good—but never made an official call. BHP Billiton, sensing defeat, pulled out.

As Stephen Harper channelled the ghost of Trudeau, his Conservatives adjusted the Investment Canada Act itself, layering on special conditions—new hurdles for China and others—to assess takeovers by state-owned enterprises and weigh national security considerations.

If Canada is changing its tone when it comes to foreign deals, it’s not alone. The US, so often considered a bastion of free-market capitalism, blocks deals, often simply with enough political outrage to scare buyers off, but also through its Committee on Foreign Investment, which is supposed to consider only national security matters. Australia has a Foreign Investment Review Board. One of that country’s richest men, Clive Palmer, recently lambasted the board as “racist legislation designed to slow Chinese growth” in the country and “a national disgrace.”

China, a totalitarian capitalist country, first arrived in the Alberta oil sands in the spring of 2005. China National Offshore Oil Corp.—CNOOC, the smallest of China’s three state-owned players—invested $150-million in MEG Energy, a tiny Calgary startup. Shortly thereafter PetroChina inked a preliminary deal to buy the equivalent of half of the flow from Enbridge’s proposed Northern Gateway pipeline, which would carry oil to the west coast for export.

With the price of oil jumping past $50 a barrel for the first time, and demand escalating exponentially at home, China wasn’t quiet about its ambitions. Hou Hongbin, a senior executive at Sinopec, told reporters at a conference in Calgary that China’s next deal would be larger than MEG and “the third one will be much bigger.”

Then came Unocal. In 2005 CNOOC launched a hostile $19-billion bid for Unocal, a US oil company with significant assets in Asia. Democrats and Republicans united in opposition, raising questions about CNOOC’s motives and concerns about its state-backed funding. The company retreated—a singular wound in the Chinese psyche that reverberates and has repeatedly been cited as evidence China will never again make such a significant move. (This was much more bruising than the rejection in Canada, a year earlier, of China Minmetals $7-billion bid for Noranda in 2004. There’d been a tremendous outcry—including even steadfast free-market commentators—and Minmetals couldn’t close a deal.)

Instead, so far, China has played it quiet, at least in North America. While it’s piled up roughly $10-billion of deals in the past several years in Canadian energy, all of them have been mostly innocuous. Sinopec spent $4.65-billion for a fractional stake, 9 per cent, in Syncrude, a deal that was in fact decried by Chinese media due to Sinopec’s allegedly paying too much. PetroChina paid $1.9-billion for a majority stake in two undeveloped projects controlled by upstart Athabasca Oil Sands. And just this July CNOOC splashed down $2.1-billion for ailing OPTI Canada, a small company and the junior partner in Nexen’s Long Lake operation. Outside the oil sands, China’s sovereign wealth fund, China Investment Corp., injected $1.7-billion into coal miner Teck Resources when that firm was ailing in 2009. CIC thereafter chose Toronto for its first international office and has invested almost $1-billion in oil sands projects run by Penn West Petroleum.

China is also making a major play for BC natural gas, but while gusto is big, matters are delicate. After a year of talks, a $5.4-billion deal between PetroChina and Encana fell apart. The proposal was large enough to set off normally pro-business commentators: the National Post’s Claudia Cattaneo wondered if Canada was “too open” and urged Ottawa to “take a stand.”

The conventional wisdom is that China will stick to this strategy, never making a big play. “If it came to it, the federal government would take a very serious look, like they did with Potash,” says Alberta energy minister Ron Liepert. “But I don’t think it’s in the cards. The Chinese government is still smarting from Unocal and I think they’re much wiser in how they’re doing their investments today.”

Other observers see something else. The Wall Street Journal in June reported on China’s “shopping spree” in Europe—where xenophobia bubbled. “We want to be sure we know who is investing in Europe, and why,” EU Industry Commissioner Antonio Tajani told the Journal, worried about China’s desire for inside looks at technology. Indeed, China has clearly stated its oil sands aims are less about getting the resource than understanding the complicated operations. The country hopes to apply lessons learned abroad at home.

Ottawa is concerned too—including the spooks at CSIS. Despite the blocked sales of MDA and PotashCorp, there is, a federal source in Ottawa tells me, a “religious adherence” to the free market. Yet the spectre of national security, which starts with Canada’s China-wary prime minister, is as powerful. “Security institutions tend to take a very dim view of direct, large-scale Chinese involvement in Canada’s economy,” he says. “The focus is on cybersecurity and economic espionage, and the basic view is that most Chinese companies, and all state-associated companies, serve as fronts for the Communist Party to efficiently deploy legions of spies and hackers.”

Nationalism (at best) and xenophobia (at worst) may yet grow in Canada. The Economist notes that China’s share of global foreign investment is at less than 10 per cent, far below the peaks of around 50 per cent by the US in the 1960s. This foreign domination led to the invention of Petro-Canada (now owned by Suncor) by Pierre Trudeau, and Alberta Energy Co. (now Encana) by Peter Lougheed in the 1970s. “People talked about ‘Oh my god, Americans own 70 per cent of what we have,’” says Gibbins of Canada West. “It captured the anxiety of the small partner in a relationship.”

But The Economist is predicting rapid change in China’s ambitions, and soon. “Buying up the world,” it declared on a recent cover, with an image of Chairman Mao offering a handful of hundred-dollar US bills. “The coming wave of Chinese takeovers.”

Murray Edwards doesn’t want Canada to be a vulnerable boy scout of global capitalism, blindly open to the market. He recently worked on a special panel on Canadian competition policy for the Harper government, research that came out strongly in favour of foreign investment. But he also believes Canada would be making a terrible mistake to sell everything to anyone.

“With certain industries that are essential to the country, it’s important to keep a Canadian presence,” he told me in an interview last November after the PotashCorp affair. On the oil sands, he was vague about which companies were untouchable. “Three or four major Canadian corporations. It’s important to keep that local sense of ownership, involvement, engagement.” It doesn’t mean, he emphasized, “that we don’t allow foreign investment.”

When asked about his own company, Edwards clammed up. Canadian Natural is worth $43-billion. On whether the firm should be on a can’t-be-sold list, even if the likes of Sinopec, or Exxon, offers an ample takeover bid: “You know, I haven’t even thought about it. We’re a larger company than PotashCorp; we’ve got a lot of unique assets.”

For Edwards, a two-tiered position is simply the reality of doing business in an open, but elbows-up, world. In his work on the competition panel, he was in Washington DC at the Treasury Department, whose officials insisted Canada should be completely open to foreign cash. Edwards poked back. “I said, ‘Okay, that’s great. We hear you on that.’ And then I said, ‘What about Unocal?’ And they said, ‘Oh, we’re open for investment in all circumstances except for special cases.’”

Tom Flanagan, the University of Calgary professor and one-time confidant of the prime minister, sees no problem with Chinese control over some Canadian oil, and criticizes the PotashCorp debate’s “incomprehensible sentences about strategic resources.” Of China, Flanagan says, “All foreign investment is good if people play by the normal rules of the market. There’re always questions raised when you have large authoritarian governments. But with the oil sands, I don’t know what a Chinese owner could do that would be contrary to Canada’s national interest. The oil’s no good unless you produce and sell it.”

Despite the bullish talk of some pundits and businesspeople, caution about China among the general citizenry seems as rampant as fear of the US was a generation ago. While 60 per cent of Albertans and British Columbians believe Canada would benefit from more Asian money in Canada, according to a 2011 survey of about 3,000 people by the Asia Pacific Foundation, there’s intransigent opposition to the idea of the Chinese government buying a controlling stake in a Canadian company. Three-quarters of Albertans are opposed to this idea, in line with eastern Canada. In BC the opposition is even stronger, at four-fifths.

“So now we have another big potential partner who appears even more strange to us and therefore Canadians pull back,” says Gibbins. “I think we have to get over that.” Still, even the likes of Jack Mintz has some qualms. The conservative U of C tax-policy specialist, who backed the PotashCorp takeover, wrote in a paper last year that he’s concerned by state-backed money’s “unfair advantages,” the ability to outbid a competitor. “We need to evaluate [any deal] properly,” says Mintz.

The companies collectively conducting the business of Beijing abroad have come to be known as “China Inc.” A common perception is that voracious China, like voracious America before it, is tramping the globe to ensure it can sate its future hunger. But there’s a darker, underlying idea that if it comes to blows, China’s stake in various resource pools will gird it through conflict.

The monolith of China Inc., however, seems a myth. While state-owned, China’s trio of national oil companies are competitors. “Commercial incentive is [their] main driver,” concludes a report this year by the International Energy Agency, the organization that advises OECD countries. Chinese companies aim to make money and serve their gigantic domestic market—until they get better prices elsewhere. Also, three-quarters of the oil that China imports sails through the dangerous and narrow Strait of Malacca, between Malaysia and Indonesia. Numerous Chinese oil companies are trying to lessen this dependence, including by backing Enbridge’s proposed Northern Gateway pipeline.

Adam Waterous thinks a Chinese takeover of an Alberta oil sands company would give us nothing to fear. The investment banker points to a benefit of dealing with the emerging superpower: a low cost of capital. The country has been a fastidious saver—unlike the orgiastic spending of Canadians and Americans—and its banks are ready to lend at low rates to Chinese companies abroad. Waterous says this is a potential boon for Canada. “It’s more jobs, it’s better for the economy,” Waterous says. “Everyone wins.”

But he isn’t blind to politics. A move on Canada’s biggest oil sands names “would generate a lot of discussion.” He warns against sinophobia, noting that CNOOC’s rejection in the Unocal sale has led to a dearth of Chinese investment in the US, which, he argues, the US economy could use. “They go to regions where they’ll be welcome,” says Waterous. “If you send the wrong signals, they’ll go away.”

Canada can draw the line on foreign investment. And there’s a growing sense a line must be drawn.

Among some critics, the chief concern is not China itself but the management of the oil sands in general, whether it’s low royalties paid to the government or damage to the environment. Maude Barlow of the Council of Canadians has reservations about Chinese investment generally, but is more concerned about Alberta’s acquiescence to US companies’ rapid development of the oil sands. “Some of the concerns around China in the oil sands are disingenuous considering how much sovereignty over our energy supplies we gave away to the US in NAFTA,” she says. She calls the oil sands a “free ride for all,” and doubts a Chinese takeover would change the status quo. “How is this so different from the control that NAFTA gives US companies over Canadian policy?” she asks.

Jennifer Grant at Pembina is focused on the condition of the land, not the name on the shovel. She believes development has gone too far too fast and that better rules are needed. Gordon Laird, the Calgary-based author of The Price of a Bargain, feels the same. He notes that Alberta, regardless of who controls leases, owns the actual bitumen. Alberta and Canada make laws and enforce them.

“Fundamentally the big issues in the oil sands would be the same whether China’s there or not,” says Laird. “What we decide to let people do in our backyard is really up to us—I don’t know that we’ve done a good job of that— but getting scared of China, at least we know where to find them. They’re an interest like any other.”

The Asia Pacific Foundation’s Yuen Pau Woo wants to stoke a “national conversation.” He says it would be about more than just China’s money in Alberta or Canada—it would be about our connections. Woo points to BC’s vast coal fields that fed Japan and now supply China. Governments in the past worked to make the exports—and domestic jobs—possible. For oil sands exports, especially pipelines such as Northern Gateway, Woo acknowledges the many environmental and First Nations impacts, but insists that Albertans, and Canadians, have to decide whether they will only supply the US or look farther abroad.

“It’s a natural instinct to confront the rapid emergence of a seemingly very powerful neighbour with some apprehension and maybe even fear,” says Woo. As for environmental and other considerations: “If we decide we want to be part of Asia’s energy future, we have to figure [these] out.”

Gordon Houlden, after serving three decades in the Canadian foreign service, including two stints in Beijing, now runs the China Institute at the University of Alberta. He says Canada’s links to Asia are an embarrassment. Houlden calls for a St. Lawrence Seaway-like effort to underpin Canada’s connection to Asia. “The centre of gravity of the global economy is in Asia,” he says. “This is a certainty.” National security, in a country where the airline, telephone companies and banks are protected, doesn’t worry Houlden. “When you’re taking materials out of the earth, putting them on a train or pipeline and shipping them to a port, the national security dimensions are modest,” he says. “The legal control—the sovereignty of Canada—remains intact.”

Canada can draw the line on foreign investment when it decides to. It’s a line rarely drawn—but, post-PotashCorp and in the oil sands, there’s a growing sense that a line must be drawn, whether for a Chinese company or one from elsewhere. A line, somewhere. But where? Unless we start soon, Albertans and Canadians will have to hold this important conversation under duress, when the hand of the province, and the country, is forced.

“As a Canadian, I want us to maintain a significant amount of ownership and control of our own resources,” says Houlden. “Selling every large, successful company does not to me seem like a great national strategy. On the other hand, we need the capital. So how can we accomplish both?” #

David Ebner is a national correspondent for The Globe and Mail. He grew up in Calgary and is now based in Vancouver.


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