A New Player in the Sandbox

From his perch behind the wheel of a heavy-hauler truck 23 feet above ground, Lucas Crisby peers out over a seemingly limitless moonscape of black, sticky sand.

Oil has been good to Crisby. With his $62,000 annual salary, he recently sold a starter home and purchased a $338,000, four-bedroom house a few doors from where he grew up. That’s a significant achievement for a 20-year-old without a college degree and only a few years of work experience.

Now, with Chinese companies pouring hundreds of millions of dollars into the vast northern Alberta oil sand deposits, Crisby and others in this former Hudson Bay trading post believe the good days have just begun.

Crisby says he doesn’t care who harvests the oil sands, as long as the paychecks keep rolling in.

“It’s a free market,” said Crisby, an Elijah Wood look-alike who rocks out to country tunes while hauling 400-ton truckloads of unprocessed sand for Syncrude, a giant Canadian oil producer.

To power its factories and fleets of new cars, China has intensified its search for oil in Asia and Africa. But Beijing’s expansion into the United States’ backyard demonstrates the risks the Asian economic giant is taking to secure energy supplies.

China’s venture into Canada has triggered unease in Washington, where some fear it could threaten U.S. energy security and set the stage for clashes. Under the 1994 North American Free Trade Agreement, Canada ensured its role as the dominant supplier for the U.S. by guaranteeing it would send a portion of its energy south of the border. Today, Canada provides 17% of America’s oil imports, 16% of its natural gas and nearly all its imported hydroelectric power.

Karen Harbert, assistant secretary for policy and international affairs at the U.S. Energy Department, said Washington didn’t believe it should tell other countries where -- or with whom -- they can do business.

“Is China’s investment into Canada’s energy sector good for the North American energy market? Ultimately, it will be up to the Canadians to figure out which way they want to go and what’s in their best interest economically and security-wise,” she said.

In the last two months, China’s three largest oil firms have announced major deals here, including a 40% stake in a $3.6-billion pipeline project.

The promise of a big new player in Alberta’s oil sands has intensified a boom in the province. Since 2002, Fort McMurray’s population has expanded by 20% to 56,000, mostly young Canadian men seeking their fortunes.

The two-lane highway heading south out of town turns into a virtual parking lot Thursday afternoons as thousands of workers head home to Edmonton and Calgary. Those who stay behind keep the cash registers ringing at places such as the Oil Can Tavern, a country bar that offers Latin dance lessons and check-cashing services.

Oil companies are beginning to import labor from as far away as Venezuela and China, which has sparked job-loss concerns among labor unions and indigenous leaders. But many Canadians, including Crisby, simply view China as another major player in an industry that has long been a global game.

Although the Canadian government owns the vast majority of the country’s energy resources, more than half of Alberta’s oil deposits are being developed by U.S. firms, including Chevron Corp., Exxon Mobil Corp. and Oklahoma City-based Devon Energy. The French, Dutch and Japanese also have invested in the oil sands.

Thanks in part to aggressive marketing by its political leaders, Canada has also been a big beneficiary of China’s economic growth. China is now Canada’s second-largest trading partner, and Chinese is the third-most widely spoken language in Canada, after English and French. More than a million people of Chinese descent have immigrated here in the last century.

There have been strains in the relationship. Before Hong Kong’s return to Beijing’s control in 1997, nervous Chinese pumped hundreds of millions of dollars into Canadian real estate and companies, triggering racial fears.

The latest influx of Chinese funds into energy and mining has prompted the Canadian government to look more closely at the national security effects of foreign investment.

Canada is closely watching the debate in Washington over competing bids for Unocal Corp. by Chevron and China’s CNOOC Ltd., a majority of whose stock is held by government-owned China National Offshore Oil Corp. U.S. critics say a Chinese buyout of the California company would put scarce energy resources in the hands of a potentially hostile government.

Wenran Jiang, a China expert at the University of Alberta, said a U.S. rejection of the CNOOC bid would make Canadians more cautious about striking energy deals with the Chinese.

Energy analysts say Canada must balance its desire for investments from China with the need to satisfy its best customer, the United States, which buys 80% of Canada’s total exports.

When Alberta Energy Minister Greg Melchin visited Capitol Hill recently, he was questioned repeatedly about China’s new role in Canada.

Melchin said he reassured U.S. officials and others that Canada’s oil sands were a “sunrise industry” with lots of room for development and that America would remain his province’s “best customer, friend and neighbor.”

But many Canadians also view the China card as a way of reminding their powerful neighbor not to take them for granted.

“Our message is it would be in the U.S.’ best interest to pay attention to your largest and best opportunity for long-term energy supply,” Melchin said. “You shouldn’t take for granted that it will automatically happen.”

Oil industry executives and analysts differ on what China’s entry into the Canadian market will mean for the United States. Some say it will have little effect on the price Americans pay for Canadian energy because oil supplies can be acquired elsewhere.

But Wilfred Gobert, vice president of Peters & Co., a Calgary investment firm, thinks greater competition for Canada’s oil could push up prices, especially if the Chinese are willing to pay more to secure a stable supply.

The process of extracting oil from sand requires large amounts of natural gas, which will increase competition for that resource as well.

However, analysts say an infusion of Chinese funds will speed up development of Canada’s oil sands, allowing the extraction of more oil for the U.S. as well as China. Pipeline developers say a large share of the oil pumped through a proposed West Coast pipeline is likely to end up in California refineries, which face declining production from Alaska’s Prudhoe Bay.

Although improved technology has significantly lowered costs, extracting the oil from sand is still a laborious, time-consuming task, requiring 2 tons of sand to produce a barrel of oil.

Critics say the process is one of the most environmentally destructive ways to squeeze oil from the earth, in part because it emits large amounts of greenhouse gases.

To reach the oil, giant pits as deep as 250 feet are being carved out of the northern Alberta forests. The sticky sands are fed through a series of machines that crush and separate out bitumen, which is then processed into crude oil.

To access the bitumen trapped far underground, a new method has been developed that injects steam into the sand and liquefies the oil.

With oil prices hovering at $60 a barrel, sucking oil out of sand is profitable.

If Canada’s output more than doubles by 2010, as projected, the oil sand producers will need new pipelines to get the crude to their customers. That’s why China is a key factor in the competition between Calgary-based Enbridge Inc. and another Calgary firm, Terasen Pipelines, to develop a pipeline from northern Alberta to the coast of British Columbia in the west.

Whichever company secures a Chinese commitment for long-term contracts will have the edge in financing its pipeline, said Steven Paget, a research analyst for FirstEnergy Capital Corp., a Calgary-based investment bank.

But getting there won’t be easy, said J. Richard Bird, group vice president of Enbridge. He said China’s big energy firms weren’t “willing to buy long-term supply without more direct investment into the oil sands,” meaning they want to help produce the oil and share in the profits.

Canadian executives said Chinese firms were more willing than Western companies to invest “patient capital” in projects that might not reap immediate profits, to gain a foothold in promising markets.

Before making its bid for Unocal, CNOOC said it would spend $124 million to purchase a 17% stake in MEG Energy, a small, privately held Calgary oil sand developer.

With the surge in oil prices, the biggest Canadian oil sand producers are being courted heavily and can afford to be choosy about their partners. Some producers say they are nervous about committing to sell oil to a new customer thousands of miles away and would be more comfortable selling to the U.S. market, where they are familiar with the players and pricing.

Thomas d’Aquino, chief executive of the Canadian Council of Chief Executives, a group of Canada’s leading firms, said he opposed any efforts to restrict China’s participation in the North American energy market, as long as its acquisitions are legal and transparent.

But he said Washington and Ottawa should think about what they would do if there was a global energy shortage and Beijing controlled a large share of Canada’s oil.

“What would it mean if China owns those resources and said, ‘No, we need them for us, we can’t send them to you?’ ”