Facing the geopolitical perils of being an 'energy superpower' Are the oil sands roping Canada into a dangerous game between China and the US? By Carl Meyer Published July 14, 2010

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On July 8, a small group of demonstrators marched toward the Canadian Embassy in Washington waving placards and chanting slogans. A typical day in the American capital in many respects, as campaigns against Canada's so-called "dirty oil" have become largely commonplace.

In this instance, the source of the protesters' anger was a plan by Calgary-based company TransCanada to extend one of its pipelines from Alberta to Texas. The Gulf Coast has an 8-million-barrel-per-day refining capability, but its source of crude from Mexico's reserves is drying up while Venezuela has decided to take its business elsewhere.

The TransCanada Keystone XL project would pump close to a million barrels per day from a spot south of Edmonton straight down to Houston, connecting with a recently finished pipeline already extending into several US states.

But the pipeline has become a lightning rod not just for the small group of demonstrators who took to the streets last week, but such US heavyweights as Democrat Henry Waxman, chair of the House committee on energy and commerce and co-author of the American Clean Energy and Security Act.

The proposed project has come to represent yet another facet of the ongoing struggle between energy security and environmentalism in the US, in which the oil sands have been caught in the middle.

Recently, the response from Canada has been to play "the trump card," as described by Dan Woynillowicz, director of strategy and external relations for the Pembina Institute, namely warning of Chinese interest in the oil sands. Another Calgary company, Enbridge, is proposing to build a pipeline from the oil sands to the West Coast to facilitate realization of this threat.

But the cutthroat global oil market, the growth of the Chinese manufacturing empire, the heavy US dependence on foreign oil and the drying up of traditional US sources like Mexico are all geopolitical elements that some experts believe are unavoidably roping Canada into a dangerous game, of which there are few exits other than conflict.

"I don't think that there's been a broad public discussion about what it means to be an energy superpower," says Mr. Woynillowicz, "and to the extent that Canada is positioned to be an energy superpower, what are the objectives or the ideals that Canadians would have in that role?"

Competition already rising

At 175 billion barrels, Canada officially has the world's second-largest proven reserves after Saudi Arabia.

The importance of oil to the global economy simply cannot be overstated: the lifeblood of global commercial transportation is gasoline, diesel and jet fuel. Houses, roads, cars, shopping are all made possible with petroleum. Plastics, pharmaceuticals and all the other petroleum byproducts have become essential. Militaries are driven by it. The entire Western standard of living is kept afloat with oceans of black gold each day.

Meanwhile, as emerging economies like China and India shift into developed country status, they are converting billions of their citizens into ever more thirsty oil consumers. The US is the world's largest energy consumer, although China is in second place and experts say it will soon overtake the Americans. China is already Canada's third-largest oil export market after the US and Japan. The US remains by far Canada's largest foreign oil market, and the largest foreign source of oil for the US is Canada.

Energy security is a key factor in all of this. In the global oil market, net exporters of oil like Canada may be looking to find and maintain thirsty markets for their product, but net importers are in the unenviable position of having to ensure a steady supply.

"There will be forces in the US, especially those concerned with national security in Congress, the Pentagon and NSC, that will be quietly making the case for Canadian oil," says former Canadian diplomat Colin Robertson, who has also worked in public affairs for Petro-Canada's International Assistance Corporation.

Terry Karl, political science professor at Stanford University and author of the book The Paradox of Plenty: Oil Booms and Petro-States, says that both China and the US are increasingly finding themselves in a competitive position in Africa and Latin America over energy and minerals, where China's investments have become game-changers. Barring a major global political shift, that is sure to eventually occur in the oil sands as well, she argues.

Experts like Ms. Karl agree that certain parts of the governments of the US and China are warily watching each other's incursions into the Alberta oil sands. At the moment the global game is being played out on the surface through a strictly business environment, and all are touting national energy security as the main factor. But as time goes on, just what that energy security mandate will mean for political relations is less known.

For now, short of military incursions, the only real way to lock down a stable energy supply is with money. With this in mind, recent Chinese firms' billion-dollar incursions into the Alberta oil sands have turned many heads. Last year close to $2 billion was spent for a stake in Athabasca Oil Sands Corp projects, while this year nearly $5 billion was spent for a stake in Syncrude Canada in April and $1 billion into Penn West in May.

Enbridge wants to build a direct pipeline to the BC coast that would pump oil straight into Chinese supertankers. The Enbridge Northern Gateway Project would pump over half a million barrels of crude oil a day to a marine terminal in Kitimat, British Columbia, where over 200 oil tankers a year could fill up on round trips. Enbridge put in their proposal in May, and the National Energy Board began seeking public consultations last Monday.

All this means there is a shift emerging in the Canada-US-China oil calculus, says Warren Mabee, associate director of Queen's University's Institute for Energy and Environmental Policy. While the US remains conflicted over whether to use the oil sands, the Chinese realize they can get a foothold.

"There's been a lot of talk over the last half-year about carbon-intensive oil, and the case that [the Alberta oil sands] is 'dirty oil.' You see places like California that are instituting laws that essentially could ban oil sands oil from that marketplace, and that can easily replicate itself across the country if that movement is sustained.... So the Alberta government has got to be interested in diversifying their customer base," he says.

"They've [China] got the money, they've got the buying power, and they are also a country that is run by a very small cadre and have not had the greatest reputation for following environmental rules, they're the country that can use this resource without any kind of fear of push-back from their own population."

Doubts in the North

The Canadian industry, however, remains skeptical of a brewing battle between the US and China over Canadian oil resources. Greg Stringham, vice-president of oil sands and markets for the Canadian Association of Petroleum Producers, says he doesn't consider the two countries to be any more intertwined than the rest of the global oil market.

Japan, Canada's second-largest export market, has been involved for decades, he says, as has Korea. The Europeans, another oil-thirsty region, have significant investments through the French, the Dutch, the Norwegians and the British.

"The fact that many of those resources left in the world to be developed are being controlled by either counties or governments or nationally-owned companies, this really does represent over half of what's really available for private investment," he says.

Some academics are also hesitant to buy into a pending geopolitical war over the oil sands. Gordon Houlden, director of the China Institute at the University of Alberta, says that the oil market would remain relatively business-focused unless two things happen that might "change the equation" and push the US and China into a direct collision course.

The first would be if the global oil market went back to a more extreme position of tight supply; the second would be a sharp deterioration in US-China relations.

Joseph Doucet, Enbridge professor of energy policy at the University of Alberta, says that "if you look at the percentage of US demand that is filled by imports, today it's not much different than it was 20 years ago, and nothing suggests in terms of use patterns and investment that that's going to change dramatically.

"I think that people who think that there's going to be a dramatic change in US consumption or import profiles are mistaken."

He also says he doesn't see any overwhelming political overtones, just the case of energy firms becoming more interested in the oil sands—adding that was notwithstanding the uncertainties regarding emissions and the "fuzzy or murky relationships" between Chinese firms and the Chinese state.

But Ms. Karl sees a difference between US and Chinese oil incursions that would push the two dangerously toward the same resources. The Chinese government doesn't concern itself with geopolitics, it only sees business opportunities, she says. While Americans see environmental destruction in the Gulf of Mexico, human rights abuses in Sudan and an anti-American government in Venezuela, China sees nothing but energy. When he was made Canadian foreign minister in October 2008, Lawrence Cannon was handed a briefing book prepared by Foreign Affairs officials. One section dealt with sovereign wealth funds, and noted when it came to non-Western countries such as Russia, China, Singapore and the Gulf States, "their investment philosophy is still unclear."

"Sovereign funds will continue to seek to acquire resource assets both for their profitability and in order to secure their country's access to these commodities," DFAIT officials wrote. "Over time this will require Canada to fully develop an investment policy with respect to sovereign funds. The difficulty for Canada is that we have given up the levers of sovereignty in a western market economy model while most of the emerging powers are going in another direction."

In the end, says Ms. Karl, the US and China will compete over every last drop unless the global powers establish an orderly transition away from petroleum dependence—something of which she is highly skeptical of occurring.

"I think it's quite scary, because there is no oil security for big powers in any long-term way, and that's because the growth in demand for oil has exceeded the growth in supply," she says.

"You basically have to deal with the fact that this isn't just a market logic but it's also a security logic. China and the United States, and India, and Europe, are going to eventually have to co-operate on this, if we're not going to have more oil-based conflicts."

cmeyer@embassymag.ca