China To North America: Send Us Your Oil

As Americans quarrel over whether fossil fuels belong in their future, Asian countries are taking a powerful message to Washington Thursday: Ship your oil and gas to us.

The case for the establishment of a transpacific energy market involving the United States and Canada as exporters, and Asian countries including China, Japan and Korea as importers, will be presented at the annual meeting of the Pacific Economic Co-operation Council, a group of 23 Asia Pacific economies that work together on public policy issues.

It’s the first time the prospect is being seriously discussed for a simple reason: It is now possible.

So far, trade between the two regions has been minute — accounting for only 1.2% of the globe’s oil trade and 0.3% of the globe’s gas trade — because the United States needed all of its domestically produced energy, while Canada, which has lots of energy available to export, does not have the infrastructure to ship to Asia.

But a series of game changers has emerged. Unconventional gas discoveries have created a North American glut that could be sold elsewhere.

 

Asian investors have started to participate heavily in North American projects, primarily in Canada’s oil sands, boosting their ability to increase production. Asian countries are eager to move away from coal and into more environmentally benign natural gas. There concerns about nuclear power following Japan’s Fukushima disaster. There are continuing and growing worries about dependence on Middle East suppliers, who are charging them very high prices.

“The big picture is that Asia is looking to increase its energy security, it’s looking to reduce its carbon footprint and strengthen economic and political ties with North America, and energy can be part of that solution,” Yuen Pau Woo, the president of the Vancouver-based Asia-Pacific Foundation of Canada, who will be presenting the message, said in an interview. “The issue really is whether North America wants to put in place the infrastructure, the policies and the relationships in order to export to Asia.”

The geopolitical implications would be significant, he argues, because a closer energy relationship between North America and Asia would reduce Asia’s dependence on the Middle East, Russia and Central Asia.

Pau Woo has been front and centre in making the case for stronger energy ties between Canada and Asia, particularly China.

Now, the message is being broadened to include the United States because of its new potential as an energy exporter, he said. Like Canada, the U.S. can build natural gas liquefaction facilities on the West Coast or in the Gulf of Mexico, allowing transportation by tanker.

But Asian interest in tapping the United States’ fossil fuels is not just about finding another energy source. It’s also about playing the United States against Canada as potential partners with Asia, much like Canada is playing China against the United States as a market for Canadian oil.

“One message that is very important for the Canadian industry and the Canadian people is: ‘While we debate in Canada whether we want to export oil and gas into Asia, let’s not fool ourselves into thinking that we are the only ones who have visibility,” Mr. Pau Woo said. “The Americans have a lot more shale gas than we do [in Canada]. And they could very well get to the prize before we do.”

It will be interesting to watch how the powerful U.S. green lobby, which has been ramping up its campaign against fossil fuels in North America ahead of the U.S. presidential election by targeting growth enablers such as the proposed Keystone XL oil sands pipeline and natural gas fracking, responds to the emergence of eager markets for North American fossil fuels in Asia. The environmental benefits cannot be denied: Oil and natural gas are cleaner than coal, reducing greenhouse gas emissions in Asia and on a global basis.

It will also be interesting to watch whether Americans have overcome their anxiety over China. It was in full display in 2005, when China National Offshore Oil Corp. had to back away from its bid to buy Unocal Corp., which was ultimately won by Chevron Corp. for less money, following huge political controversy.

Pau Woo said the response from the U.S. administration has been positive because it raises the possibility of export growth in a new sector that seems to have rich potential, and because “it is a useful counter weight to the very parochial discussions around pipelines and American energy drilling and other controversial issues.”

Industry is well aware of the story and is supportive. Today’s message aims to start the debate with policy makers and the public.

Financial Post