CNPC executive announces China’s exit from the Gateway Pipeline Project
Andrea W. Lorenz
China has dramatically altered its international investment policy, pulling back on its plans for direct participation in Canada’s oilsands and withdrawing its support for Enbridge Inc.’s $4-billion Gateway Pipeline Project to deliver bitumen and synthetic crude oil to the west coast.
At a July oilsands forum in Calgary hosted by TD Newcrest, Yiwu Song, vice-president of CNPC International (a subsidiary of the China National Petroleum Corp.), outlined the changes along with China’s reasons for re-evaluating its enthusiasm for the oilsands: projects, he said, take too long to get off the ground and the political environment here “frustrates” Chinese investors.
Song’s comments to a stunned audience followed hard on the heels of a presentation by David Roberts, Marathon Oil’s senior vice-president, business development, who said that while there were “challenges” associated with developing Canada’s oilsands, those were mitigated in large part by Canada’s advantage as being one of the more “politically benign” places to invest in the world.
From the tone of Song’s presentation, however, China does not hold the same view on Alberta’s oilsands.
“To us, it’s just the opposite,” he said. “That’s why we changed our minds about investing in the oilsands.” His company now classifies the oilsands business as comparable in difficulty to deepwater drilling.
In his presentation, Song said China’s strategy as it pertains to Canadian investment opportunities would follow a new direction:
1. Slow down its involvement in the Canadian oilsands business.
2. Give up its involvement in the Gateway pipeline project.
3. Wait for better investment policies and politically friendly opportunities coming in the future.
CNPC’s earliest projection for producing bitumen from Alberta’s oilsands remains a decade in the future, Song said, making it clear that China’s near-term strategies are pointed directly at Venezuela, where a “warm-hearted” President Hugo Chavez has taken steps to nationalize oil operations.
Under the new regime, Venezuela expects heavy oil exports to China to rise to 600,000 barrels per day within a few years, and CNPC is now focused on building a pair of upgraders to process that crude.
Not surprisingly, Song’s announcements were greeted with surprise by most in the audience.
Steven Gilliland, executive vice-president of operations for Synenco Energy, said it was the first he’d heard of a shift in Chinese policy. Synenco is developing the Northern Lights oilsands project, in which Sinopec, another state-run Chinese company, holds a 40 per cent interest.
Greg Stringham, vice-president, government affairs for the Canadian Association of Petroleum Producers, was also surprised. “That’s news to me,” he said. He thought the announcement was especially puzzling given that in January, CNPC purchased 258.6 square kilometres of oilsands acreage estimated to hold two billion barrels of bitumen.
Still, he said, CAPP had received a “heads up” that official Chinese policy towards investment in the Canadian oil patch was changing course. He recently saw a list of 10 or 12 “countries of interest” for Chinese investment, he said, and “Canada was on the list for 2005 and 2006, but it was not on the list for 2007.”
Significantly, Song made it clear that CNPC’s frustration with the inability to move Enbridge’s pipeline forward played a large part in its overall decision.
“We have decided to give up our involvement in the Gateway Pipeline Project,” he told a scrum of reporters following his presentation. “We didn’t renew the MOU [Memorandum of Understanding] with Enbridge. We took the decision last year.”
Earlier, Enbridge executive vice-president Richard Bird told the forum that “Gateway plus the second phase of Alberta Clipper [to deliver Alberta crude to U.S. Gulf Coast refinery markets] are still in planning.”
He said nothing of the Chinese decision to pull out of the pro-ject, but did say that the project has been postponed until post-2011. Enbridge did not return phone calls seeking clarification.
Song’s presentation included an invitation to the audience to invest in China. He described his company’s vast reach across the globe, its rapidly expanding production and its newly developed engineering and technical services divisions.
Describing the state-run company as a “unique integrated energy syndicate,” he said CNPC runs 69 projects in over 26 countries and has built more than 20 refineries. Its 1.3 million employees work in more than 500 enterprises.
CNPC’s estimated recoverable reserves are 19.7 billion barrels of oil and 78.3 trillion cubic feet of gas. It operates 21,000 kilometres of natural gas pipelines, 10,941 kilometres of crude pipeline and 19,207 gas service stations, and currently produces 2.7 million barrels a day of crude oil and 4.6 billion cubic feet a day of natural gas.
Two slides in Song’s presentation showed plainly that China is focusing its efforts to build energy security for its people not necessarily in North America but in what he described as “politically friendly” countries.
Judging from presentation slides showing CNPC officials smilingly engaged with Chavez, Saudi Arabian King Abdullah, Russian President Vladimir Putin, and other Asian and African leaders, those efforts are going just about everywhere in the world but North America.
In his remarks to reporters following his speech, Song described in detail the reasons for CNPC’s frustration.
“Here you need a very long time,” he said. “It takes three years just to start up a pipeline. The situation keeps changing. We’re fed up already.”
Evincing a treadmill, he spun his hands one over the other, and added, “I’m not angry with Enbridge. We started discussions three years ago. Up to now nothing happened. You just put a lot of money for nothing. CNPC just doesn’t understand this.”
He noted that CNPC saw Enbridge’s need to consult with more than 30 First Nations along the pipeline’s right-of-way as a major stumbling block. “Enbridge cannot overcome this kind of First Nation issue,” he said. “We cannot play this game for too long. We are very sorry for Enbridge.”
Song’s message then became conciliatory. “We sincerely want to do something,” he said. However, he followed that with an unsparing critique of Prime Minister Stephen Harper’s China policy.
“The government of Paul Martin was more positive. That’s for sure. The key word is uncertainty. I just want your government to get this message.”
During his presentation, Song noted that CNPC has good working relationships with major integrated IOCs (international oil companies) including Total, BP, Shell Rozneft and Gazprom, and Canada, he said, would be well advised to establish a comparable IOC.
Such organizations, his presentation noted, offer “international operation experiences, technologies, value chain management, and [avoidance of] sensitive issues.”
Before being pulled away from the press scrum by an assistant, Song offered this advice: “You need a very organized, integrated plan.” He added, “Your people need time to know the new China.”
Synenco’s Gilliland shed some light on the challenges of dealing with a Chinese state-owned company. “It’s a command and control government,” he said.
Still, Synenco has forged an excellent working relationship with its partner on the Northern Lights Project, SinoCanada Petroleum Corp. (a division of Sinopec).
SinoCanada now has five secondees embedded in the project, and the company’s engineering arm is also participating in the design of a proposed 100,000-barrels-per-day upgrader in Sturgeon County near Edmonton.
One reason the relationship has worked so well, Gilliland said, is that “Sinopec was very aggressive, and their approach was very westernized.”
Sinopec succeeded in fast-tracking its own procedures in a process that its Canadian partners found exceptionally efficient. “They spent one and a half months doing their due diligence,” Gilliland noted. “That’s a pretty westernized timeline.”
Even so, the Northern Lights Project is dogged by some of the frustrations that Enbridge faces with its Gateway Pipeline.
Synenco recently had to take a “time out” from the regulatory process involved in building the upgrader. The increase in cost to $6.3 billion from $5.3 billion requires that the partners reconfigure their engineering plans, he said.
Gilliland described soaring costs as “the elephant in the room.” He noted that capital costs for Greenfield upgraders currently range between $43,000 a barrel for 200,000 barrels-per-day facilities to $63,000 per barrel for 100,000 barrels-per-day plants, while greenfield mining and extraction projects range between $38,000 and $48,000 per barrel.
One of the other difficulties Synenco and other new oilsands players face is finding equipment manufacturers with space and resources to fill their orders.
Ideally, Synenco would place its orders with a shop in Edmonton, Gilliland said, “but everyone is full up until 2014. We could maybe find shops in the U.S. but they’re pretty full up.”
Instead, the company has designed a bold plan to have its equipment fabricated in Asia and shipped across the Pacific and up the Mackenzie River. Synenco plans to ship 40 modules, some weighing as much as 2,000 tons, over a three-year period, although the fabrication and shipping schedule remains uncertain.
How serious is CNPC’s threat to move its investment focus away from Canada’s oilsands? Gilliland described the message as “what I call Chinese Greek speak,” and he cautioned, “Don’t read anything into it other than what is on the slide.”
Despite Yiwu Song’s blunt criticism, Canadian heavy crude is already making its way to China. Kinder Morgan Canada president Ian Anderson said that two or three tankers had been routed recently to China in “test runs.”
New refineries there are designed to process increasing volumes of heavy crude arriving from Venezuela and even Saudi Arabia, and the Chinese are now experimenting with various assays of Canadian crude.
Kinder Morgan moves five vessels a month, each one carrying between 500,000 and 550,000 barrels of crude, from its docks in Vancouver. Most head to ports in California and Washington, but some are destined for markets in Asia.
Anderson explained that it is difficult to track exactly where the cargoes end up because, “once they hit water it becomes almost a virtual market,” with a shipment changing course depending on where its buyers are located. Still, it’s clear that Chinese refiners are testing the compatibility of Canadian crude.
Whether the volume of Canadian heavy oil shipped to China increases “depends on whether these blends are economic for them and on their appetite for them,” said Anderson.
Another executive with a major Canadian company, who asked not to be identified, concurred. “Be careful that they are not using you [the press],” he warned.
Song’s criticisms may just be “political theatrics,” he said, adding, “Chinese companies have been given the mandate to go out and find oil and gas resources across the world and to sew up deals as fast as they can. Instead of taking the traditional 1,000 year view, now they want things done in 1,000 days.”
CNPC at a glance
Number of employees:
Number of international ventures:
69 projects in over 26 countries
Number of refineries: 20
Recent purchases from Canadian-owned entities:
PetroKazakhstan for US$4.1 billion
EnCana Ecuador (55 per cent) for US$1.4 billion
PetroCanada’s Syrian assets (50 per cent) for US$574 million