In determining whether Ottawa should allow Chinese state-owned enterprise CNOOC Ltd. to buy Canadian energy firm Nexen Inc., much hangs on one question: Is Canada in a position of weakness or strength vis-à-vis China? In the Financial Post today, I argue that Canada is in a position of strength and we can say no to CNOOC. My column below:
By Brian Lee Crowley, Financial Post, November 27, 2012
If China is angered by a no on Nexen, it will only hurt itself
In determining whether Ottawa should allow Chinese state-owned enterprise (SOE) CNOOC Ltd. to buy Canadian energy firm Nexen Inc., much hangs on one question: Is Canada in a position of weakness or strength vis-à-vis China?
This matters because so much hinges on whether Canada will be benefited or harmed by the fallout from the decision, especially should Ottawa turn down the proposed acquisition.
Proponents of the deal make two separate cases why we not only should but indeed must approve CNOOC’s bid. They argue, first, that Canada needs access to the Chinese market for our oil and gas. Second they claim that Canada needs access to Chinese capital to develop our natural resources. They then go on to argue that if we fail to get either form of access the national prosperity being generated by the West’s oil-fuelled boom is endangered.
If they are correct about the consequences of not gaining access to Chinese consumers and capital, then their case in favour of the CNOOC deal is powerfully strengthened. Few Canadians would like to see our natural resource-based good fortune dissipated, and the arguments of those pushing the deal, like Justin Trudeau, the oil patch, the financial community, the Alberta government and others, are that that good fortune is deeply vulnerable to Chinese displeasure. But are they correct about the weakness of Canada’s position?
Let’s look in turn at each argument, starting with Canada’s need to sell oil and other resources to China.
The International Energy Agency, the best source of reliable data on the likely shape of future energy markets worldwide, said just this month in its World Energy Outlook 2012 that between now and 2035 most of the growth in demand for oil will take place in the developing world. Those non-OECD countries will be taking two-thirds of production by then. And China will be the single largest driver of the growth in consumption, with its demand rising 60% by 2035, followed by India (where demand more than doubles) and the Middle East. Finally, they foresee a modest rise in the value of a barrel of oil, to about US$125 in current dollars.
In the IEA’s basic scenario, global oil demand increases fairly slowly from just over 87 million barrels a day in 2011 to reach nearly 100 million barrels a day in 2035. China will account for half of the net increase worldwide. Or put the other way, non-Chinese markets will account for every bit as much of the increase as China.
These numbers tell us that the world demand for oil is growing and the price is rising. Lots of people besides the Chinese want oil. That’s a seller’s market, not a buyer’s market.
And Canada is a highly desirable supplier of that oil because we are reliable, enforce contracts, have the rule of law and a stable regulatory, legal and fiscal environment. That’s why oil companies find it worthwhile to invest in the oil sands when extracting a barrel of oil there costs roughly US$80 versus less than US$20 to extract it in Saudi Arabia. Canada has a huge reputational and institutional leg-up on many other potential suppliers. Would you like to be reliant on dysfunctional Nigeria, thuggish Venezuela, unstable Iraq or nice polite Canada for your oil?
Now think about the oil itself. Leaving aside marginal differences in quality reflected in prices, oil is a global commodity bought by global customers at a global price. Some buyers might be motivated by politics, like an angry China snubbing Canadian oil. But in a world where demand is rising and supply is limited, every Canadian barrel they snub must be replaced with a Saudi or an Indonesian or a Venezuelan barrel. But presumably those barrels also had buyers, who now have to make up the shortfall.
Where will they look? Canada. We will now have spare production on the market and the new buyer will pay essentially the same price the Chinese would have had to pay. As long as oil is globally traded and we have the capacity to reach foreign markets, it is quite immaterial whether China buys from us or not. China may be anxious to tie up supply to protect the growth it thinks it needs for domestic political reasons, but that makes it an anxious buyer, a seller’s dream. Advantage: Canada.
How about access to capital? What if an offended capital-rich China cuts off Canada’s natural resource industries?
The stakes are not small. According to the Alberta government’s official website, the oil sands alone will require $218-billion in capital investment over the next 25 years. Sounds like a lot. But it’s less than $10-billion a year. By contrast, the assets of the global fund management industry increased 10% in 2010 to reach a record $79.3-trillion, of which only a small fraction is in the hands of sovereign wealth funds. This global pool of capital increases by roughly $8-trillion a year. The oil sands need a microscopic 0.14% of that. The investment pool of the Canada Pension Plan Investment Board alone is slated to grow faster than the capital needs of the oil sands over the coming years.
The world is not short of capital. It is awash in capital hungry for a decent return. Yes, the oil sands need billions in investment, but in return investors get access to the third-largest oil reserves in the world. While there’s good money in bitumen, China’s fits of pique are also immaterial.
Remember, too, that oil companies the world over invest in circumstances far more trying than Canada’s humble foreign-investment review process. Oil companies endure the risks of armed rebellion, insurrection, kidnapping of executives, corrupt officials, uncompensated nationalizations and far worse. BP’s leading executive in Russia fled that country in 2008 in fear of his life. Armed gangs attack Shell’s facilities in Nigeria. And still the companies come.
In our oil patch you find companies from America, Britain, France, Norway and many other countries besides. As long as there is money to be made, capital will flow in and oil will flow out. Advantage: Canada.
Now here’s a different question for the advocates of the CNOOC deal: If China and its SOEs are so trustworthy and market-driven, why is the argument that the Chinese will act petulantly, belligerently and contrary to their own economic interests (forgoing stable oil supplies at prevailing prices, for example) if Canada doesn’t do exactly what they want? In the sporting world that’s called an own goal.
Financial Post
Brian Lee Crowley is the managing director of the Macdonald-Laurier Institute, an independent non-partisan public-policy think-tank in Ottawa. www.macdonaldlaurier.ca @MLInstitute
