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Canada Crude to China? Prospects and Barriers of Increasing Chinese Imports of Canadian Oil

May 05, 2011 // 9:00am11:30am
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China Environment Forum
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Kang Wu, East-West Center

Nathan Lemphers, Pembina Institute

Norm Rinne, Kinder Morgan Canada

China is actively seeking to diversify its sources of oil imports and views Canada as a potentially important supplier, said Kang Wu of the East-West Center at a program hosted by the Canada Institute and China Environment Forum. The program assessed the prospects and barriers of increasing Canadian oil exports to the Asian market, as well as China's desire to import heavy crude from Canada. Wu was joined on the panel by Nathan Lemphers of the Pembina Institute and Norm Rinne of Kinder Morgan Canada.

China's Energy Strategy

Wu stated that since the 1980s, China has transformed from Asia's largest oil exporter to a country that imports almost 4.8 million barrels per day (mmb/d). Roughly half of China's imported oil comes from the Middle East, with another 30 percent from Africa. While China has actively sought to diversify its sources of oil imports, Canada has not yet emerged as a major supplier. Canada does have a window of opportunity to become a more significant player in satisfying Chinese energy demand. Wu explained that China's own crude oil production may have already peaked, meaning the Chinese will have to pursue additional oil from foreign sources in order to meet its growing demand. In fact, China's demand for crude is projected to increase from its present level of 4.8 mmb/d to 11.4 mmb/d by 2030.

Wu said that the majority of China's oil imports will be transported by tankers, though the country's oil pipeline infrastructure is expanding. By 2015, explained Wu, China is expected to increase its level of imported oil via pipeline from 10-15 percent from its present level of 4 percent. Wu remarked that most Chinese refineries can only handle light, "sweet crude" and currently lack the ability to process the heavy crude that makes up the bulk of Canadian oil production.

Wu maintained that because China has only recently become a net importer of energy, the country's energy security strategy is in a nascent stage. In addition to diversifying its oil and gas imports, China plans to establish strategic petroleum reserves, increase investment in oil and gas infrastructure, and continue to aggressively pursue overseas investment in upstream oil and gas assets. According to Wu, the three major Chinese oil companies (Sinopec, PetroChina, and the China Offshore National Oil Corporation) have invested 7.4 billion dollars in Canadian oil sands projects.

Increasing China's Share of Canadian Oil Exports

Canadian industry has increasingly highlighted the need to diversify Canada's oil exports beyond the United States. According to Lemphers, this sentiment is partly driven by general weariness over Canada's reputation among some in the United States that the country exports "dirty oil." Diversifying Canada's oil exports would also insulate Canada from the economic affects of U.S. legislation, such as implementing a national low carbon fuel standard (LCFS) that could threaten Canada's ability to export oil from the oil sands to the United States. Given China's expanding appetite for energy, several initiatives are underway in Canada that would allow a greater quantity of Canadian oil to reach China and other destinations in the Asian market.

Enbridge's Northern Gateway Project represents one of the major Canadian pipeline proposals that targets China as an export destination. Lemphers explained that Enbridge has applied for federal approval of its Gateway project, which would involve constructing a 728 mile pipeline from Canada's oil sands to Kitimat, British Columbia, where the crude could then be shipped internationally by tanker.

Nevertheless, noted Lemphers, the proposal has been met by fierce opposition in Canada. Fearing the increased prospects of an oil spill, British Columbia's government recently passed a motion to ban tanker traffic off its coast. Seventy First Nation groups in British Columbia maintain that the Gateway project and tanker traffic would violate their traditional laws. If approved, Gateway could be completed by as early as 2017 and would have a capacity to transport 525,000 bpd.

Lemphers contends that major issues remain that puts into question the need for the Gateway pipeline. For instance, China's demand for oil is by no means certain, considering that China has already surpassed the United States in clean energy investment. He also pointed out that there are currently no shipper agreements in place for the Gateway project from China or elsewhere, and China currently lacks the ability to process heavy crude from Canada in its refineries. Without shipper agreements or the necessary refineries to its key export destination, Lemphers argued that building Gateway equates to "putting the cart before the horse."

However, Wu did acknowledge that China has been preparing to receive heavy crude oil imports for a number of years. If Canadian projects did move forward and promised China a large enough supply of oil, the Chinese government could move to construct refineries designed specifically to process heavy crude from Canada's oil sands.

A View From Industry

Kinder Morgan's TransMountain pipeline system (TMPL) has been safely transporting crude from the oil sands to Port Metro Vancouver for more than 50 years, said Rinne. The vast majority of crude from TMPL currently flows to California with a much smaller percentage (roughly 13 percent) destined for the Asian market. TMPL, noted Rinne, currently has a capacity of 300,000 bpd, but plans are underway to expand its capacity to 700,000 bpd. Rinne noted that the future percentage of oil exported to the Asian market instead of the United States depends in part on U.S. climate legislation. For instance, should California's LCFS affect imports of Canadian crude, it is likely that exports from TMPL would be rerouted to Asia, said Rinne. In fact, shipping oil to Asia from Vancouver only costs 1-2 dollars more per barrel than transporting the crude to California. However, Rinne said that it is important for industry to continue its work to reduce its own environmental footprint and noted that he remains optimistic that emerging technologies, such as carbon capture and storage, could achieve this aim.

Rinne maintained that the TMPL expansion must be completed with the highest environmental standards in order to minimize its impact on First Nations lands and sensitive ecosystems, noting that TMPL currently passes through two national parks in Canada and the Canadian Rockies. Such difficult and sensitive terrain is the major reason why constructing the TMPL expansion is roughly 3-4 times more expensive than constructing similar pipelines on the Prairies. Rinne said he expects the total cost of the TMPL expansion to be in the range of 1-5 billion dollars.

By Ken Crist
David Biette, Director, Canada Institute

  
Event Resources: 

A better case for Keystone XL, Washington Post Editorial Board, May 1, 2012

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