April marked a small leap forward in China's energy relations with Canada. China National Offshore Oil Corp put down US$150 million (HK$1.17 billion) for a one-sixth stake in MEG Energy Corp, an upstart oil sands company. This is China's first major investment in Canada's vast oil sands industry. Two days later, PetroChina International signed a memorandum of understanding with Canada's giant pipeline company Enbridge, promising cooperation in the US$2.5 billion Gateway pipeline from Alberta to the West Coast that may supply China with 200,000 barrels of crude a day once completed. China's large energy corporations are predicting more such deals but at a ``much bigger'' scale.

These developments followed the first official visit by Canadian Prime Minister Paul Martin to China in January. The two countries signed the Canada-China Statement on Energy Cooperation in the 21st Century, promising to work closely in the areas of oil, gas, oil sands, energy efficiency, environment, and related ventures.

Canada is one of the most energy-rich countries in the world, while China needs greater amounts of energy to sustain its growing economy. The two countries appear to be complementary in their respective energy situations, and the potential for cooperation seems unlimited. But such a proposition, attractive as it is for the future, has not been demonstrated in the history of their bilateral energy relations. Looking ahead, there are still hurdles to be overcome.

As the second largest oil consumer in the world after the United States, China's state-controlled energy companies have reached out to every corner of the world, searching for more energy and resources, and signing deals worth tens of billions of dollars. But until recently, there was little achievement in China-Canada energy cooperation. Major deals, statements, and initiatives in the past 10 years have included:

High level mutual visits by prime ministers and other senior ministers and provincial leaders expressing strong interests in developing closer energy relations with each other;

The sale and construction of two Canadian CANDU 6 nuclear reactors in Qinshan, outside Shanghai, was completed under budget and ahead of schedule in 2003;

Proposed energy-related projects also include energy efficiency in building; reduction of CO2 emissions from coal-fired utility boilers; renewable energy diversification; transfer of small hydro technology; solar energy for rural electrification in western China; sustainable cities initiative; and urban rehabilitation and conservation.

Despite these efforts, there has not been much progress in bilateral energy cooperation over the years with the exception of the two nuclear reactors.

So far China is yet to purchase any significant quantities of Canadian oil.

However, Canada's huge oil sands may have finally caught Chinese attention. According to the latest estimates, Canada's oil reserve stands at 176 billion barrels, second only to that of Saudi Arabia, and 50 percent more than Iraq.

Such an upgrade in ranking of resources is due to a reclassification of the status of Alberta's oil sands to the economically recoverable category. Today, Alberta produces more oil from oil sands than from conventional reserves. Although the cost of extracting oil from sand is higher, at about US$12 per barrel compared to roughly US$4 per barrel for conventional recovery in the Middle East, it is still a profitable operation when the world oil price hovers in the US$45-US$55 range. Canada also enjoys the kind of political stability that the Middle East and many other oil producing regions lack. With current Alberta oil production at three million barrels a day, and half of that going to the United States, there is still a surplus available after satisfying domestic needs. Billions of dollars' worth of oil sands development projects, pipelines and related projects are in the process of being planned and implemented.

With the lure of Alberta's potentially massive oil sands production, there are signs that at last the two countries may engage in some substantial cooperation. Proposed by Premier Wen Jiabao during his visit to Ottawa in late 2003, Canada and China developed the Common Paper of the Canada-China Strategic Working Group, with the following bilateral priorities in the energy area: to strengthen their bilateral dialogue on energy; to establish a Joint Working Group on Energy Cooperation; to explore collaboration in research and development of oil sands technology, engaging other players as appropriate; to conduct research on the development of advanced nuclear energy technologies and related issues to improve the cost and safety of nuclear energy systems; and to strengthen linkages and pursue joint projects and initiatives in energy efficiency and cleaner energy, including renewables.

This was followed by high-level visits by Canadian leaders with an agenda in pushing for energy cooperation with China. Alberta's Premier Ralph Klein went to China last June, with a focus on selling Alberta's huge energy potential and attracting Chinese investment. John Efford, Minister of Natural Resources Canada, was received by China's National Development and Reform Commission last September, resulting in the establishment of the annual meeting of the NDRC-NRCan Working Group. Again, Martin's recent visit to China identified oil and gas, nuclear energy, energy efficiency, and cleaner energy as priority areas of cooperation.

Official endorsements seem to have encouraged some real business movement. According to various news reports, all major Chinese energy companies are actively looking into potential business opportunities in Canada, with some of them, such as Sinopec, showing interest in buying stakes in the vast reserves of the Alberta oil sands. In addition to the recently sealed deals between Chinese firms and MEG and Enbridge, another Canadian pipeline company, Terasen, is reportedly talking with Sinopec and China National Petroleum about joining forces to increase the capacity of an existing pipeline to Vancouver. The company had supplied almost a dozen tanker loads last year to help Chinese refineries determine their capacity in processing the Alberta crude oil blends.

Despite the recent momentum, Canada has yet to strike a major deal with China. Last year, China and Iran signed energy contracts in the range of US$100 billion, which will ensure Iranian supplies to China for the next 25-30 years. The year before, President Hu Jintao signed energy deals worth up to US$40 billion during his trip to Australia. There are still a few issues that need to be resolved to realize such large bilateral projects with Canada.

First, any major energy collaboration between Canada and China will be closely watched by the United States. Some Americans have warned of the potential of China as a competitor and of taking away energy from Canada at the expense of the United States. Currently, Canada is America's largest source of imported oil. Its exports to the Midwestern US have grown steadily since 2001, pushing Canada ahead of Saudi Arabia, Mexico, and Venezuela to become the largest supplier of foreign fuel, with average exports running at 1.6 million barrels a day. Thus, one argument is that every barrel of Canadian oil going to China will be one less going to the United States which, in turn, has to import oil from other parts of the world that are likely hostile to Washington. It is a zero-sum game. Some estimates claim that potentially a third of Canadian energy could go to China in the future.

Second, China has its own concerns. Noting that Canada is locked into a clause in the North American Free Trade Agreement that it cannot cut back its energy supply to the US unless Canada cuts back on its own consumption, Chinese worry about what would happen if the Canadian production level drops and thus cannot meet a commitment to supply China with either oil or gas. Canada has a market-oriented answer to such concerns: Canada has plenty of oil and its production capacity is more than enough to satisfy the US market, thus China is simply a new market for export. Murray Smith, former Alberta energy minister who is now Alberta's representative in Washington, estimates that out of potential exports of more than three million barrels a day, Canada could export as much as one million barrels of oil a day to China.

Third, China's coming to the Canadian energy sector may have broader strategic implications. While China's exploration of potential Canadian supplies is relatively quiet, its recent engagement in Latin America has been high-profile, with considerable publicity. The most provocative to Washington is the cozy relationship Beijing has developed with Venezuela, the fourth-largest foreign oil supplier to the US.

Venezuelan President Hugo Chavez, in his recent visit to China, signed agreements to allow Chinese companies to explore for oil and gas, and to set up refinery facilities in Venezuela. The move, he claimed, is to reduce dependence on the US.

To American strategic planners, there are also political implications beyond economics. Canada and Venezuela, together supplying a third of America's crude imports, may have more leverage over Washington with their oil potentially going to China. And Chinese control or partial control of resources in these countries may weaken US-Canadian relations, and may compromise US domination in Latin America. The debate over the implications of a closer relationship with China in the energy area is also going on in Canada. Industry Minister David Emerson has raised the issue of revising the Canada Investment Act, and talked about Canadian energy and resources as strategic assets. The Canadian government may have to tread carefully with any potential Chinese takeover of major Canadian energy or resource companies.

While a few large deals may be reached soon, there are still barriers ahead. The Chinese dragon remains hungry but fuelling its energy appetite is no simple task.

JAMESTOWN FOUNDATION CHINA BRIEF 2005

Wenran Jiang is associate professor of political science at the University of Alberta, Canada