Shifting Sands

Added to the lack of reliable information on the size of proven reserves is disquieting political news. The Saudi regime is fading, unstable, and under threat from Osama bin Laden. In December, a car bomb outside the Interior Ministry complex drove the price of oil up by $1.87 (US) per barrel within hours. Russia, the Sudan, and Iraq have well-publicized political problems, Nigeria remains a repressive regime that has had interruptions in oil flow due to civil unrest, and Venezuela’s Hugo Chavez is musing about cutting off supply to the US.

When oil hit $55.67 (US) a barrel last October, up to $15 of that amount was estimated by analysts to be a terrorist premium. The Americans are building military bases in Iraq, have US troops guarding pipelines in Colombia, and know that terrorists will target oil. But Alberta is almost absurdly stable: in seventy years the government has changed once, slouching to the left in 1971 with the election of the Conservatives. “There is no more secure supplier to the United States than Canada,” states a report by the Center for Strategic and International Studies in Washington, DC.

America has 5 percent of the world’s population and consumes 25 percent of its oil—20 million barrels per day. “The oil sands are the most strategically important oil source for the US,” the University of Alberta’s Mark Anielski said. Oil is no longer simply a commodity for the US but a national security issue. “The Bush administration was clearly trying to put energy as the number one public-policy issue,” said Murray Smith, formerly Alberta’s energy minister and now its envoy to Washington. This was before 9/11. In a White House that has intimate ties to oil interests (aside from Bush’s involvement in several unprofitable Texas oil companies and Dick Cheney’s connection to Halliburton, with its lucrative oil contracts in Iraq, Condoleezza Rice was on the board of Chevron), energy was propelled to the forefront of the Pax Americana, a cornerstone of foreign policy that borrows from Psalms: “War was in his heart: his words were softer than oil, yet they were drawn swords.” It carries more than a whiff of destiny.

Along with the US, China views potential energy shortages as one of the most serious threats to national security and social stability. Less than a decade ago, it was a net exporter of oil, but now needs to import approximately three million barrels per day. Its energy needs have grown by 7 percent annually and may accelerate further, at least in the short term. “China will eclipse the US consumption in twenty years or less,” Anielski said, “and there’s not enough oil to feed two superpowers.”

China is currently making oil deals in Saudi Arabia, Russia, Nigeria, the Sudan, looking for control of the resource wherever possible. The reason for these deals isn’t strictly business,” said Keng Chung of the Alberta Energy Research Institute and a senior research associate at Syncrude. “It’s politics.” The Chinese oil company Sinopec is contemplating a bid on Husky Oil, which is controlled by Hong Kong billionaire Li Ka-shing and which owns oil sands leases. “Sinopec is a state enterprise,” said Chung. “Making money isn’t the first priority. The priority is: secure the petroleum. They want two million barrels per day from Alberta.”

China’s presence in Alberta has created a growing uneasiness in the US. A December New York Times story with the title “China Is Emerging As a Rival to U.S. For Oil in Canada” began with the nervous paragraph: “China’s thirst for oil has brought it to the doorstep of the United States.” (The Canadian ambassador noted that it was the first time in more than four years that the word Canada had appeared above the fold in the New York Times). Under the terms of the North America Free Trade Agreement (nafta), the US is guaranteed a percentage of Canada’s oil. (Canada currently produces 2.6 million bpd of oil and exports 1.6 million, or about 60 percent of it, to the US.) American investment controls between 40 and 50 percent of Alberta’s oil, and there is an understandable sense of proprietorship—American officials went to Calgary to monitor talks between the Chinese and various Canadian oil companies. Syncrude had already sent a trial shipment of oil to PetroChina. Enbridge was negotiating with China to build a $2.5-billion pipeline from Edmonton to the west coast, possibly with the Chinese assuming a 49-percent interest in the project. Another Canadian company, Terasen, was talking to both Sinopec and the China National Petroleum Corporation about increasing the capacity of an existing pipeline to the west coast. uts, a Calgary company that has a large lease in the oil sands, turned to China when its American partner pulled out, citing the high costs of extraction and Canada’s participation in the Kyoto Protocol. For the Chinese, cost is less of an issue.

If the Chinese take a significant position in the oil sands, it will mean a diversified market for Canada, more foreign investment, and consumer competition—the closest thing to international market leverage the country possesses. It will call America’s bluff as a champion of free markets, which has always been more of a marketing position than an actual strategy. China has been one of the tentative oil suitors in occupied Iraq, and its presence there is seen by Washington as a provocation. Its presence in Alberta is seen as a provocation as well. “The biggest concern for the Chinese in the oil sands is the Americans,” said Keng Chung, “just as the biggest concern for the Americans is the Chinese.”

As the world’s superpower and its emerging rival circle one another in the boreal forest of northern Alberta, the question is raised: what exactly is Canada’s role? Under nafta, the US is guaranteed access to Canadian oil and gas even in the case of domestic shortages. Conceivably, the eastern bastards could freeze in the dark, as Alberta bumper stickers advocated during the 1970s. During his January visit to China, Prime Minister Paul Martin made muted noises regarding Chinese ownership of Canadian resources, expressing concern, trying to find the right political tone in a debate from which he is largely excluded. The federal government doesn’t own the resource, but, through the National Energy Board, it does control exports, and could conceivably limit the amount the Chinese ship home. In that case, China would simply use the sophisticated system of hedges and barters that govern international oil contracts, selling to the US and receiving an equivalent supply from another source.

In 2003, Paul Cellucci, the US ambassador to Canada, said that the time had come “to complete the integration of our energy markets.” One suggestion has been for the US to guarantee a fixed price for oil sands crude going south. In return, the US would get unrestricted access to the resource. A collaborative report from two Canadian and American investment groups state that such an arrangement could give Wall Street investors “the comfort required to commit the billions of dollars necessary for optimal production from the oil sands.”

The Canadian Council of Chief Executives, a lobby group which includes some of Canada’s most powerful ceos, believes oil could be a key to expanding nafta in a number of areas in exchange for a secure supply of crude from the oil sands. It would effectively integrate the North American economy and eliminate tariff and subsidy disputes, like the softwood lumber issue. According to the joint investment analysts’ report, it is the Alberta reserves and the “special relationship” between Canada and the US that “should be driving [oil] prices; not Washington’s less than perfect relationship with monarchies and repressive regimes half a world away.”