Post 7 - 2005.05.28
China and Canada:
"Fueling the Dragon..."In
LRP’s 2005.04.14 "Crisis
on the China Rim..." (CCR) analysis, we discussed China’s
need to reach far beyond its borders to satisfy its huge and rapidly expanding crude oil
needs. Here’s an excerpt from page 34 of CCR:
"...China and India have combined proven crude
oil reserves of only 23.7 billion barrels ...this equates to just 2.3% of the world total
...however, both countries taken together account for more than 10.0% of total
worldwide crude oil consumption ...despite promises to not compete for dwindling
international crude oil supplies, we expect that China and India will compete fiercely
for access to energy reserves beyond their borders"
On 2005.05.09, the Asia Pacific Foundation of Canada released a report titled "Fueling the Dragon: China’s Quest for Energy Security and
Canada’s Opportunities" which describes in detail Canada’s
emergence as a key supplier of crude oil to China. This highly-informative 16-page report
is comprised of four sections: China’s Thirst for Energy; Canada Comes Into Play;
Much Talk, Little Action in Energy Sector Cooperation; and Looking to the Future. Notable
quotes – some referencing data that has previously appeared elsewhere - include the
following:
China’s Thirst for Energy:
"In only 10 years, China has turned from a petroleum
exporter to the second-largest oil consumer in the world, burning about six million
barrels of oil a day. Although still far behind the United States, which consumes some 20
million barrels a day, China is projected to reach a daily level of 10 million barrels
within the next two decades or so."
"While the Chinese economy grew by 9.5% last year
[2004], its oil imports jumped 40%."
"Forecasts see China ’s need for crude
increasing annually by 12% until 2020. And there is a clear indication that China is
following in the footsteps of the United States and Japan in its demand on foreign
supplies: while China ’s current dependency on foreign oil is about 40%, it will be
well over 60% in less than two decades."
"...China ’s modernization drive has
produced a manufacturing structure that progressively requires more energy, an energy
consumption system that is inefficient and difficult to sustain."
"With less than 4% of global GDP, China consumes 31%
of the world ’s coal, 30% of its iron, 27% of steel and 40% of cement."
"To generate every US$1 of GDP, China uses more
than three times as much energy as the global average, 4.7 times more than the US, 7.7
times more than Germany and 11.5 times more than Japan."
"In 1999, only 220,000 vehicles were sold [in
China]. Last year, the number was 2.04 million — a 69% sales growth and an 80.7%
production increase year-over-year. From 24 million cars in 2003, China is projected to
have 57 million private automobiles by 2010 and 130 million by 2020."
"According to UPI Energy Watch, the annual average
fuel consumption per car in China is 2.2 tons, 10-20% more than in the US and double that
of Japan."
"If 1.3 billion Chinese were to use 20 times more
energy every day - that is, the same per capita consumption as in North America —
China would require 80 million barrels of oil a day, more than the entire world ’s
current daily consumption. Even if only a quarter of China ’s population begins to
consume as much energy as North Americans, there will be a major crisis."
"Currently, well over 60% of China ’s power
is generated from coal. Nuclear energy and natural gas have very little share in China
’s overall energy supply."
"...China has just announced that it will build
40 more nuclear power plants by 2020, with roughly three times the generating capacity of
the Three Gorges Dam, which is already the world’s largest hydroelectric plant."
Canada Comes Into Play:
"According to the latest estimates, Canada’s
oil reserve stands at 176 billion barrels, second only to those of Saudi Arabia, and 50%
more than Iraq. Such an upgrade is due to a reclassification of the status of
Alberta’s huge oil sands to the economically recoverable category."
"Although the cost of extracting oil from sand is
higher, at about $12 per barrel compared to roughly $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$40-50 range."
Looking to the Future:
"Unlike other resource rich countries, Canada has
yet to strike a major deal with China. Last year [2004], China and Iran signed a deal
worth up to US$100 billion, which will ensure Iranian supplies to China for the next 25-30
years. The year before, Chinese 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."
"Currently, Canada is the largest source of
imported oil for the US. 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 oil, with average exports running at 1.6 million barrels a day."
"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 ask questions such as what
would happen if the Canadian production level drops and thus cannot meet a commitment to
supply China with either oil or gas." (The underline in this sentence has been
added by LRP.)
LRP has two key comments regarding the quotes above.
First, while NAFTA is roundly criticized in the US for
yielding only modest benefits for American workers and consumers, the foresight that led
American negotiators to incorporate into NAFTA a clause linking Canadian oil consumption
and Canadian crude oil exports to the US was, in our view, brilliant. As worldwide
energy competition becomes increasingly intense, this clause might well take on the
historical significance of the US’s 1823 Monroe Doctrine and 1867 Alaska Purchase.
Second, we don’t share the energy
security-related concerns of some experts regarding China’s increased interest in
establishing expanded crude oil supply agreements with Canada. China-Canada trade
lanes across the northern Pacific Ocean are vulnerable to US embargo, and the US’s
recently-announced redeployment of US Navy assets from the Atlantic coast of the US to the
Pacific coast will provide enhanced US energy security in this regard. In fact, the
development of strong energy ties between China and Canada – as well as China and
Venezuela - could represent an important "Achilles Heel" in long-term Chinese
strategic planning. Our sources anticipate that an important element in
China’s development of credible military force projection in the Pacific will be the
creation of formidable blue water fleets dedicated to securing China-Canada and
China-Venezuela trade lanes.
Posted by:
Kevin B. Skislock
Partner and CEO
Laguna Research Partners
[bio] [disclaimer]
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