the dark side of the north american energy renaissance
TRANSCRIPT
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The dark side of the North American Energy Renaissance Isthe quest for American energy security begetting broaderinsecurity?
James Stranko
For Energy in the Americas Professor Francisco Gonzlez
17 April 2012
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Given election year rhetoric around energy security and dependence on oil from
questionable political regimes, many Americans would be stunned that less than 15% of
the countrys oil imports come from the much maligned Middle East. The renaissance in
production across the U.S. and in Canada has meant a major disruption in the OPEC vs.
the West narrative that played on continuous loop through the 1970s, 1980s, and 1990s.
Despite essentially flat demand growth in the US over the past several years, its sources
of its energy imports have changed dramatically and fundamentally.
Most significantly, oil from the vast subterranean reserves in the Athabasca basin of
Alberta has fundamentally changed the North American energy matrix. Through the
exploitation of previously unviable oil sands projects, Canada has gone from being a
marginal supplier of crude to the United States to its largest single source of energy
imports in less than 20 years. The Keystone XL pipeline, and the subsequent debate
around its approval, serves as an example of how much things have changed. Building on
the already high barrel per day figure that Canada exports to the US, IHS CERA reckons
Total Barrels Per Day Imported by U.S. 1973-2009
Chart Source: US Energy Information Administration, 2010b/c.
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the proposed 700,000 barrel per day Keystone XL pipeline would...foster higher
production and greater use of North American oil in the US market.1 Beyond that, it would
shift Canada into pole position as Americas swing producer - exporting more than twice
the amount Saudi Arabia sends to the United States.
Another major advantage is that oil reserves in North America, and particularly Canada,
are among the few accessible reserves that have been discovered and proved. Nearly
75% of the worlds reserves, instead, are under the control of state-owned or controlled oil
companies, meaning a more complicated and less market-oriented process to exploit
them. This makes the Canadian
oil sands particularly valuable to
investors the lack of state
intervention often makes for a
more s tab le inves tment
particularly for American oil
majors.
In the near term, this implies a
number of positive changes for nearly all the actors involved. For the United States, this
shift means less reliance on political btes noirlike Hugo Chavez and less exposure to the
rapidly deteriorating Cantarell field in Mexico. For Canada, and particularly the western
province of Alberta, these changes mean a fiscal and political boon unseen in its postwar
history. For Latin America, and particularly new oil players like Brazil, this means looking to
new markets like China to absorb its optimistic production forecastsand access to the
excess capital that Asian countries can offer for development or infrastructure goals.
1 IHS CERA, The Role of the Canadian Oil Sands in the U.S. Energy Market http://www.ihs.com/products/cera/energy-report.aspx?id=1065929738
Source: Canadian Association of Petroleum Producers vis BP Statistical
Review
http://www.ihs.com/products/cera/energy-report.aspx?id=1065929738http://www.ihs.com/products/cera/energy-report.aspx?id=1065929738http://www.ihs.com/products/cera/energy-report.aspx?id=1065929738http://www.ihs.com/products/cera/energy-report.aspx?id=1065929738http://www.ihs.com/products/cera/energy-report.aspx?id=1065929738 -
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In the longer term the trend is more complicated, because it means a fundamental shift in
oil markets and in the relationships that shape the production and marketing of oil. The
shift is multifaceted, but one constant is realigning political relationships and upending
marketsthat constant is Chinas imminent role as worlds largest oil importer. This means
that standards of governance, ways of doing business, and the industrys rule makers are
all in flux complicating the idea of what energy security really means. Certainly it means
a North America that does not need to import nearly as much oil anymore due to domestic
and regional production. But it also means that the other oil-producing states, rife with
inconvenient political issues and lax standards of governance, are now teaming up with
opaque foreign national oil companies (NOCs) and undemocratic governments. For North
America, and particularly the United States, the implications of this may undermine any
idyllic notions of what energy security and oil independence actually means.
What this means for the hemisphere
The story of Venezuelans in Canada is a good place to begin a discussion on what these
hemispheric shifts mean for both sides of the Americas. After Chavez took power in 1999,
he embarked on a fundamental restructuring of the Venezuelan welfare state. By
rewarding the working classes that formed the base of his support and squeezing the elite
that formed his electoral opposition and potential usurpers, Chavez made it clear to his
country and the world that the American order in Latin America had a potent challenger.
Chavez took the strike as an opportunity to purge opposition from the beleaguered
company. Nearly half of PDVSAs professionals were removed, some 18,000 people, and
many looked elsewhere for opportunities to employ their skills. Of that huge pool of talent,
nearly 3,000 Venezuelans migrated north to jobs in Alberta. This has benefitted Canada in
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a number of waysparticularly given a reserve profile that looks more like Venezuelas
than any other oil-producing country. The heavy oil in the Orinoco belt and the bituminous
sands in Northern Alberta are two of the worlds largest non-conventional crude deposits
technologies to extract the two are very similar, and refinery requirements are nearly
identical. But Venezuelas main advantage was its location, with a large portion of the
worlds refining capacity right across the Gulf of Mexico.
Canada has benefitted enormously from instability and uncertainty in traditional oil
producers like Venezuela. Some of this fortune was tragicomicthrough Hugo Chavezs
ability to fritter away enormous resource wealth through populism at lightning speed all
while isolating investors. Some of this fortune was strategic with Canadas immigration
policies favoring highly skilled migrants and investment policies favoring innovation. But
much of the fortune came from an alignment of geopolitical and macroeconomic factors
including the price of oil, the return on capital, and even U.S. visa restrictions after
September 11th, 2001. In the process, Canadas oil industry has gobbled up physical and
human capital from major American energy firms, the very force behind their
establishment. That countrys industry also capitalized on the continuing atrophy of poorly-
run state firms like PDVSA of Venezuela by poaching politically unwelcome but technically
competent executives.
At the same time, North American oil is not only displacing Middle Eastern oil, but also oil
from Latin America. This trend owes itself to number of technical factors, ranging from
declining production and sclerotic investment in Mexico to resource mismanagement in
Venezuela. This has all happened while record demand from Asia (principally China) has
shifted sights for downstream marketers east.
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Amidst the fallout of the Keystone XL pipelines political difficultieswhereby Canada has
rattled the saber of piping crude to its west coast and eventually to Chinahides a more
subtle reality. The energy boom in Canada and the United States means that the natural
customer of Latin American oil will likely be China. And coming at a time when China is
heavily invested in other extractive industries across the continent, this relationship will
begin to define a new era in Sino-Latin relationsfurther displacing Western trading
partners.
While it means oil exporters in Latin America like Venezuela, and would-be producers like
Brazil, have little to fear from a North American energy renaissance, it also means that
China has an unprecedented opportunity to insert itself into the hemisphere in a way that
does not challenge its state-owned company business practices. This is already
happening in meaningful ways and investments have not only been made in exploration
and production of oil but rather in easing access to the Pacific coast for easy export to
China.
One example is in Atlantic-facing Venezuela, where its energy minister announced in
December 2010 that Chinas three largest NOCs would invest $40 billion through 2016 in
aimed at a 800,000 barrels per day increased production capacity along with a heavy-oil
China Demand Growth Against Global Growth
Chart Source: International Energy Agency
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specific refinery that could produce 200,000 barrels per day.2 At the same time, Venezuela
already has in the works a multi-billion dollar Chinese loan finance the CNPC-led
expansion of a Cuban refinery processing 150,000 barrels per day. And Venezuela is also
asserting itself in the mainland, cooperation with China to build a 400,000 barrel a day
refinery in southeast China that will process Venezuelan oil. 3
Oil for loan contracts - the
wave of the future?
China is investing heavily in
resources projects across the
Americas (and in many
places around the world
i n c l u d i n g A f r i c a a n d
Southeast Asia), by providing
loans in return for guaranteed
supplies of crude. This makes its presence fundamentally different from Western
companies in two ways: it is aiming for physical rather than financial return and it is putting
down hard cash in exchange for securing energy and other commodity supplies in the
future. And the headline numbers behind the Sino-Latin American agreements mask the
broader symbiosis of the agreements. The agreements are simple upfront loan payments
that are destined to develop the infrastructure to develop thefields and ancillary projects to
facilitate oil export. China gets greater energy security and supply diversity, countries like
2 Latin Trade, Feb. 7, 2011 http://latintrade.com/2011/02/chinas-buying-spree-venezuela-a-match-made-in-globalization
3 Christian Science Monitor, Mar. 21, 2011http://www.csmonitor.com/World/Americas/2011/0321/China-grabs-Latin-America-well-ahead-of-Obama-s-outreach/(page)/2)
http://www.csmonitor.com/World/Americas/2011/0321/China-grabs-Latin-America-well-ahead-of-Obama-s-outreach/(page)/2http://www.csmonitor.com/World/Americas/2011/0321/China-grabs-Latin-America-well-ahead-of-Obama-s-outreach/(page)/2http://www.csmonitor.com/World/Americas/2011/0321/China-grabs-Latin-America-well-ahead-of-Obama-s-outreach/(page)/2http://www.csmonitor.com/World/Americas/2011/0321/China-grabs-Latin-America-well-ahead-of-Obama-s-outreach/(page)/2http://www.csmonitor.com/World/Americas/2011/0321/China-grabs-Latin-America-well-ahead-of-Obama-s-outreach/(page)/2http://www.csmonitor.com/World/Americas/2011/0321/China-grabs-Latin-America-well-ahead-of-Obama-s-outreach/(page)/2http://latintrade.com/2011/02/chinahttp://latintrade.com/2011/02/china -
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Brazil and Venezuela get the funding for the longer-term capital investment, and no messy
international organizations or pushy international oil companies are involved in the
process.
In 2009 and 2010 alone the China Development Bank made promises to lend $35 billion to
borrowers in Argentina, Bolivia, Brazil, Ecuador, and Venezuelathreefold the amount the
Inter-American Development Bank approves every year for the entire region.4 This is a
very different type of loan aid than the type given by the West and organizations like the
IDB. China also signed headline-catching agreements with Brazil to help finance
construction of extractive capacity in its new offshore Tupi fields, in return for a long-term
delivery contract once production comes onstream.5
All of this activity seems like the perfect storm for Latin America - loans without
international organization strings attached, a reliable customer for oil exports, and a
strident independence from North-South trading relationships. Of course, unless China
enters in sweetheart forward contracts or buys enough resources to distort markets, fears
that the US and China will clash over oil are misguided. But market power in oil importing
and buying creates strong political incentives to lock down supplies. This has already
begun to distort traditional power structures in the Middle East and is beginning to do so
as Latin America exports more to China.
At the same time, this trend is forging a new type of diplomatic pressure on Latin American
governments, and one where significant challenges have yet to be seen or understood.
Markets have mechanisms for dealing with countries that default on bonds or do not repay
loans to international organizations. Western governments have ways of punishing rogue
financial actors through established diplomatic and intergovernmental channels. But there
4 Cardenas, full text
5 Economist, Nov. 5, 2011 http://www.economist.com/node/21536570
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is no established practice for countries that fall afoul of opaque arrangements with
Chinese state companies or with the Chinese development banks.6 And in a region where
national interests often conflict with international obligations, disputes may be inevitable.
North America deflecting a political reality to Latin America?
But these are very different disputes from those China has encountered elsewhere in the
hemisphere. In Canada and the United States, Chinas efforts have largely been beat back
proactively by domestic politics. While the Chinese have successfully invested in some oil
sands interests (through ConocoPhillips), but did so at a premium of nearly 100% of the
stakes assessed valuewhich would have made it difficult for the government to claim the
deal did not bring economic benefit to Canada.7 Things are not much different in the
United States. And although some Chinese companies have begun joint ventures in the
U.S. and Canada, Chinas record investing in North America has been spotty at best. Its
most famous war story came when CNOOC submitted an unexpected, all-cash bid for
Unocal in the midst of a planned takeover by Chevron. The generous offer, however, was
famously rebuffed by the U.S. Congress and more specifically the shadowy Committee on
Foreign Investment in the U.S. (CFIUS), who considered the transaction an undue
incursion by China in an area of U.S. national security.
But given failures elsewhere it appears they may be demanding some premium from
Chinese companies that want to operate in-country. Whether this is to compensate for the
political ramifications or the uncertainty of how to deal with Chinese NOCs in one of
Canadas most precious energy assets is unclear. Regardless of the reason why
6 Geoff Dyer, lecture at SAIS, Mar. 28, 2012
7 Hatcher (Houston Chronicle), http://www.chron.com/business/article/ConocoPhillips-selling-oil-sands-stake-1695317.php
http://www.chron.com/business/article/ConocoPhillips-selling-oil-sands-stake-1695317.phphttp://www.chron.com/business/article/ConocoPhillips-selling-oil-sands-stake-1695317.phphttp://www.chron.com/business/article/ConocoPhillips-selling-oil-sands-stake-1695317.phphttp://www.chron.com/business/article/ConocoPhillips-selling-oil-sands-stake-1695317.phphttp://www.chron.com/business/article/ConocoPhillips-selling-oil-sands-stake-1695317.php -
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substantial alignment could not be attained, the Canadian and American governments
have been firm on its attitude towards national interest in large foreign resource
acquisitions, and Chinese NOC investments have not been given on par treatment with
those from elsewhere. In Latin America, the capital and the investment has been
welcomed, perhaps without the same political and practical scrutiny the Chinese NOCs
have faced from their northern neighbors. And perhaps when things start to go wrong, and
projects do not materialize, Chinese companies and the Chinese development bank might
yet learn the lessons Western investors have learned countless times in Latin America.
All oil is from a single barrel but how does it get there?
One reason for this dichotomy comes from the governance standards that vary widely
across the hemispheres oil industries. On one end of the spectrum is Canadian oil, which
is subject to some of the most rigorous regulation and oversight in the world. IHS CERA
concluded with the exception of Norway, Canada is the only major oil-exporting country
that scores highly on all measurements of civil, political, and economic freedom, including
the rights of women to full career, medical and travel choices; on media freedom, religious
freedom, and property rights, as well as on other measurements such as judicial
independence and relative freedom from corruption.8
One of Canadas most prominent commentators on the oil sands, Ezra Levant, has based
his central argument on the idea that the provenance of oil, the way it is found, produced,
bought, and sold is a human matter, and we can judge it against our cultures economic
and social values.9 Paul Wells, a respected columnist in Canadas leading newsweekly
8 In Americas Interest, Canadian Oil, Fraser Institute, http://www.fraserinstitute.org/research-news/display.aspx?id=17853
9 Ibid.
http://www.fraserinstitute.org/research-news/display.aspx?id=17853http://www.fraserinstitute.org/research-news/display.aspx?id=17853http://www.fraserinstitute.org/research-news/display.aspx?id=17853http://www.fraserinstitute.org/research-news/display.aspx?id=17853http://www.fraserinstitute.org/research-news/display.aspx?id=17853 -
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Macleans, summed up the new talking point this way: Levants thesis is simple enough:
compared to most of the worlds oil sources, northern Alberta is a veritable bastion of
stability, political enlightenment and environmental responsibility.10
With a view towards promoting market-oriented values in the oil market, exporting oil from
Canada to China implies a very different commercial relationship than with Latin America.
This is what makes Chinese oil imports from Canada a much different strategic issue than
imports from Venezuela, Ecuador, or even Brazil. Investing in Canada requires an
international standard of transparency and disclosure, and producing oil there implies a
standard that can easily stand up to American scrutiny.
The accountability gap does not just flow from China, however, as Latin American
governments are increasingly hostile towards the US and European oil companies
operating within their borders. Even standard bearers of responsible government and
stable policy like Brazil are beginning to demonstrate their antagonism to the old guard of
the supermajors. Brazilian prosecutors are mooting criminal charges against Chevron
executives after a small oil spill off the coast to Rio de Janeiro. This comes in addition to a
nearly US$12bn fine the government is trying to levy on the supermajor as a consequence
of the initial 3,000 barrel spillwhich may grow as oil continues to seep from the well.
And while Chris Garman from Eurasia Group told the Financial Times in March that the
legal challenges faced by Chevron and Transocean are much more about how
independent stakeholders have ridden a political firestorm which emerged from Chevrons
spill than about a growing anti-foreign or anti-IOC [international oil company] government
stance, the damage in some sense has been done. International news outlets have
reported on the Chevron executives passports being confiscated and demands by more
zealous officials to shut Chevrons operations entirely. When contrasted with the fact that
10 Macleans Magazine, Jan. 20, 2012, http://www2.macleans.ca/2012/01/20/crude-awakening/
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Petrobras had more than 30 oil spill incidents in 2011, the alleged double standard
becomes even more evident.11 During an interview with Al Jazeera, Thomas Pyle from the
Institute for Energy Research concluded the move is sending a message that if youre not
Petrobras or not a NOC and you do business in Brazil, you may run the risk of this
inconsistent and hammering effect.
Another headline-grabbing incident is what is occurring with YPF and Repsol in Argentina.
Especially considering the Fernndez administrations muted reaction to investment from
major Chinese energy companies over the past several years, Repsol/YPF's future is a
clear indication of the hostilities private Western energy firms face in Argentina and more
widely in the region. The stage has been set either invest (even where it is not
economically viable) or suffer the consequences. Meanwhile Chinese firms, which offer
ancillary investment and sub-market rate financing, make it arguably more difficult for Latin
American governments to take similar action. But the action could also mask a more
delicate truth that given the new Chinese financing and investment paradigm, the pain of
international financial punishment and isolation from Western markets may not sting as
much anymore.
This is why, where China is concerned, the most successful Chinese joint ventures and
resource-based investments in the oil sector have taken place in non-OECD jurisdictions
and with companies that are not fully market-driven. Where Chinese NOCs have failed has
been in those with fully transparent vetting processes in more advanced economies.And
although there could be a selection bias with Chinese companies unwilling to get involved
in areas where they know they will face challenges, the message state companies are
sending is clear. Even if it is not credible, investee governments like Canada and the U.S.
11 Al-Jazeera English, Mar. 2012 http://www.youtube.com/watch?v=DH9XVeEEbAo
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believe Chinese NOCs operate best where local standards of governance, monitoring and
accountability are as flexible as Chinas own.
So then Latin America, much more than North America, stands at an important crossroads
between the two types of investment China has been making abroad. With few exceptions,
Latin American countries have much stronger institutions and more stable governments
than other recipients of Chinese inward investment. At the same time, there is enough
leeway in Latin American political and economic systems (including the presence of large,
state-owned resource companies) to broker deals with Chinese companies without much
external participation or democratic legitimacy. Without proper oversight or accountability,
deals like those struck between NOCs could become a detrimental factor in democratic
development in the hemisphere.
Estimated Chinese Share of Overseas Equity in Oil-Exporting Countries
Chart Credit: International Energy Agency
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Whats next?
When the CEO of Shell says in an interview with CNBC he has given up on predicting oil
prices, it is easy to conclude nothing is certain in global energy markets. At the same time,
the trend in macro demand is clearChinas demand is going up and the Wests demand is
flat. Supply trends are not so clear globally but in the Americas supply is clearly trending
upwards.
If the buoyant North American market dynamic was not enough to shift market dynamics in
the hemisphere, some of the worlds largest consumers of oil are exploring and forming
partnerships in Latin America with NOCs and as NOCs. With some of the largest reserves
also operating under the auspices of the state, the oil market could be moving towards a
new normal. In this world, the post-OPEC rules of governance and a de facto American
supervision over markets does not apply. Instead, governments broker deals with other
governments, and market forces are not the principal drivers of price and supply contracts.
And this is not just in the energy sector but also in the vast extractive sectors that have
driven the Asian trade relationships in the past decade. At a time when Latin America has
completed a democratic transition in a period of economic stability a feat unimaginable to
weary observers inside and outside the region where these trends lead the region could
raise thorny questions about the quality of democracy.
Combined with political theater unfriendly to Western/American interest like Chevrons
current experience in Brazil or Repsols experience in Argentina, European and North
American companies will feel increasingly squeezed out of what used to be a key market.
In the vacuum, Chinese state companies can invest heavily in extractive projects, and the
infrastructure that abuts them all at a low cost and in the coziness of a world of state
capitalism.
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A report put out this month by the Inter-American Dialogue concluded that Latin American
countries are beginning to see the U.S. as less and less relevant to their needsand with
declining capacity to propose and carry out strategies to deal with the issues that most
concern them. 12 The Economist, commenting on the report, worries further that the
American response will be tepid and unfocused at best, and that urgent work will be
neglected and useful opportunities missed, with potentially wretched long-term
consequences for the whole hemisphere.13
Regardless of the broader effects of Americas willingness to engage with the hemisphere,
energy is a key issue that has clearly escaped the control of American policymakers and
Western oil interests. It is a cruel irony that the North American energy renaissance, under
the banner of regional energy autonomy, may drive the United States to finally worry about
its standing in the region.
12 Inter-American Dialogue, http://www.thedialogue.org/.../IAD2012PolicyReportFINAL.pdf
13 Economist April 15, 2012, http://www.economist.com/node/21552587
http://www.economist.com/node/21552587http://www.economist.com/node/21552587http://www.thedialogue.org/.../IAD2012PolicyReportFINAL.pdfhttp://www.thedialogue.org/.../IAD2012PolicyReportFINAL.pdf