the dark side of the north american energy renaissance

7/29/2019 The dark side of the North American Energy Renaissance

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The dark side of the North American Energy Renaissance Isthe quest for American energy security begetting broaderinsecurity?

James Stranko

For Energy in the Americas Professor Francisco Gonzlez

17 April 2012


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Given election year rhetoric around energy security and dependence on oil from

questionable political regimes, many Americans would be stunned that less than 15% of

the countrys oil imports come from the much maligned Middle East. The renaissance in

production across the U.S. and in Canada has meant a major disruption in the OPEC vs.

the West narrative that played on continuous loop through the 1970s, 1980s, and 1990s.

Despite essentially flat demand growth in the US over the past several years, its sources

of its energy imports have changed dramatically and fundamentally.

Most significantly, oil from the vast subterranean reserves in the Athabasca basin of

Alberta has fundamentally changed the North American energy matrix. Through the

exploitation of previously unviable oil sands projects, Canada has gone from being a

marginal supplier of crude to the United States to its largest single source of energy

imports in less than 20 years. The Keystone XL pipeline, and the subsequent debate

around its approval, serves as an example of how much things have changed. Building on

the already high barrel per day figure that Canada exports to the US, IHS CERA reckons

Total Barrels Per Day Imported by U.S. 1973-2009

Chart Source: US Energy Information Administration, 2010b/c.


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the proposed 700,000 barrel per day Keystone XL pipeline would...foster higher

production and greater use of North American oil in the US market.1 Beyond that, it would

shift Canada into pole position as Americas swing producer - exporting more than twice

the amount Saudi Arabia sends to the United States.

Another major advantage is that oil reserves in North America, and particularly Canada,

are among the few accessible reserves that have been discovered and proved. Nearly

75% of the worlds reserves, instead, are under the control of state-owned or controlled oil

companies, meaning a more complicated and less market-oriented process to exploit

them. This makes the Canadian

oil sands particularly valuable to

investors the lack of state

intervention often makes for a

more s tab le inves tment

particularly for American oil

majors.

In the near term, this implies a

number of positive changes for nearly all the actors involved. For the United States, this

shift means less reliance on political btes noirlike Hugo Chavez and less exposure to the

rapidly deteriorating Cantarell field in Mexico. For Canada, and particularly the western

province of Alberta, these changes mean a fiscal and political boon unseen in its postwar

history. For Latin America, and particularly new oil players like Brazil, this means looking to

new markets like China to absorb its optimistic production forecastsand access to the

excess capital that Asian countries can offer for development or infrastructure goals.

1 IHS CERA, The Role of the Canadian Oil Sands in the U.S. Energy Market http://www.ihs.com/products/cera/energy-report.aspx?id=1065929738

Source: Canadian Association of Petroleum Producers vis BP Statistical

Review
http://www.ihs.com/products/cera/energy-report.aspx?id=1065929738http://www.ihs.com/products/cera/energy-report.aspx?id=1065929738http://www.ihs.com/products/cera/energy-report.aspx?id=1065929738http://www.ihs.com/products/cera/energy-report.aspx?id=1065929738http://www.ihs.com/products/cera/energy-report.aspx?id=1065929738


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In the longer term the trend is more complicated, because it means a fundamental shift in

oil markets and in the relationships that shape the production and marketing of oil. The

shift is multifaceted, but one constant is realigning political relationships and upending

marketsthat constant is Chinas imminent role as worlds largest oil importer. This means

that standards of governance, ways of doing business, and the industrys rule makers are

all in flux complicating the idea of what energy security really means. Certainly it means

a North America that does not need to import nearly as much oil anymore due to domestic

and regional production. But it also means that the other oil-producing states, rife with

inconvenient political issues and lax standards of governance, are now teaming up with

opaque foreign national oil companies (NOCs) and undemocratic governments. For North

America, and particularly the United States, the implications of this may undermine any

idyllic notions of what energy security and oil independence actually means.

What this means for the hemisphere

The story of Venezuelans in Canada is a good place to begin a discussion on what these

hemispheric shifts mean for both sides of the Americas. After Chavez took power in 1999,

he embarked on a fundamental restructuring of the Venezuelan welfare state. By

rewarding the working classes that formed the base of his support and squeezing the elite

that formed his electoral opposition and potential usurpers, Chavez made it clear to his

country and the world that the American order in Latin America had a potent challenger.

Chavez took the strike as an opportunity to purge opposition from the beleaguered

company. Nearly half of PDVSAs professionals were removed, some 18,000 people, and

many looked elsewhere for opportunities to employ their skills. Of that huge pool of talent,

nearly 3,000 Venezuelans migrated north to jobs in Alberta. This has benefitted Canada in


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a number of waysparticularly given a reserve profile that looks more like Venezuelas

than any other oil-producing country. The heavy oil in the Orinoco belt and the bituminous

sands in Northern Alberta are two of the worlds largest non-conventional crude deposits

technologies to extract the two are very similar, and refinery requirements are nearly

identical. But Venezuelas main advantage was its location, with a large portion of the

worlds refining capacity right across the Gulf of Mexico.

Canada has benefitted enormously from instability and uncertainty in traditional oil

producers like Venezuela. Some of this fortune was tragicomicthrough Hugo Chavezs

ability to fritter away enormous resource wealth through populism at lightning speed all

while isolating investors. Some of this fortune was strategic with Canadas immigration

policies favoring highly skilled migrants and investment policies favoring innovation. But

much of the fortune came from an alignment of geopolitical and macroeconomic factors

including the price of oil, the return on capital, and even U.S. visa restrictions after

September 11th, 2001. In the process, Canadas oil industry has gobbled up physical and

human capital from major American energy firms, the very force behind their

establishment. That countrys industry also capitalized on the continuing atrophy of poorly-

run state firms like PDVSA of Venezuela by poaching politically unwelcome but technically

competent executives.

At the same time, North American oil is not only displacing Middle Eastern oil, but also oil

from Latin America. This trend owes itself to number of technical factors, ranging from

declining production and sclerotic investment in Mexico to resource mismanagement in

Venezuela. This has all happened while record demand from Asia (principally China) has

shifted sights for downstream marketers east.


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Amidst the fallout of the Keystone XL pipelines political difficultieswhereby Canada has

rattled the saber of piping crude to its west coast and eventually to Chinahides a more

subtle reality. The energy boom in Canada and the United States means that the natural

customer of Latin American oil will likely be China. And coming at a time when China is

heavily invested in other extractive industries across the continent, this relationship will

begin to define a new era in Sino-Latin relationsfurther displacing Western trading

partners.

While it means oil exporters in Latin America like Venezuela, and would-be producers like

Brazil, have little to fear from a North American energy renaissance, it also means that

China has an unprecedented opportunity to insert itself into the hemisphere in a way that

does not challenge its state-owned company business practices. This is already

happening in meaningful ways and investments have not only been made in exploration

and production of oil but rather in easing access to the Pacific coast for easy export to

China.

One example is in Atlantic-facing Venezuela, where its energy minister announced in

December 2010 that Chinas three largest NOCs would invest $40 billion through 2016 in

aimed at a 800,000 barrels per day increased production capacity along with a heavy-oil

China Demand Growth Against Global Growth

Chart Source: International Energy Agency


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specific refinery that could produce 200,000 barrels per day.2 At the same time, Venezuela

already has in the works a multi-billion dollar Chinese loan finance the CNPC-led

expansion of a Cuban refinery processing 150,000 barrels per day. And Venezuela is also

asserting itself in the mainland, cooperation with China to build a 400,000 barrel a day

refinery in southeast China that will process Venezuelan oil. 3

Oil for loan contracts - the

wave of the future?

China is investing heavily in

resources projects across the

Americas (and in many

places around the world

i n c l u d i n g A f r i c a a n d

Southeast Asia), by providing

loans in return for guaranteed

supplies of crude. This makes its presence fundamentally different from Western

companies in two ways: it is aiming for physical rather than financial return and it is putting

down hard cash in exchange for securing energy and other commodity supplies in the

future. And the headline numbers behind the Sino-Latin American agreements mask the

broader symbiosis of the agreements. The agreements are simple upfront loan payments

that are destined to develop the infrastructure to develop thefields and ancillary projects to

facilitate oil export. China gets greater energy security and supply diversity, countries like

2 Latin Trade, Feb. 7, 2011 http://latintrade.com/2011/02/chinas-buying-spree-venezuela-a-match-made-in-globalization

3 Christian Science Monitor, Mar. 21, 2011http://www.csmonitor.com/World/Americas/2011/0321/China-grabs-Latin-America-well-ahead-of-Obama-s-outreach/(page)/2)
http://www.csmonitor.com/World/Americas/2011/0321/China-grabs-Latin-America-well-ahead-of-Obama-s-outreach/(page)/2http://www.csmonitor.com/World/Americas/2011/0321/China-grabs-Latin-America-well-ahead-of-Obama-s-outreach/(page)/2http://www.csmonitor.com/World/Americas/2011/0321/China-grabs-Latin-America-well-ahead-of-Obama-s-outreach/(page)/2http://www.csmonitor.com/World/Americas/2011/0321/China-grabs-Latin-America-well-ahead-of-Obama-s-outreach/(page)/2http://www.csmonitor.com/World/Americas/2011/0321/China-grabs-Latin-America-well-ahead-of-Obama-s-outreach/(page)/2http://www.csmonitor.com/World/Americas/2011/0321/China-grabs-Latin-America-well-ahead-of-Obama-s-outreach/(page)/2http://latintrade.com/2011/02/chinahttp://latintrade.com/2011/02/china


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Brazil and Venezuela get the funding for the longer-term capital investment, and no messy

international organizations or pushy international oil companies are involved in the

process.

In 2009 and 2010 alone the China Development Bank made promises to lend $35 billion to

borrowers in Argentina, Bolivia, Brazil, Ecuador, and Venezuelathreefold the amount the

Inter-American Development Bank approves every year for the entire region.4 This is a

very different type of loan aid than the type given by the West and organizations like the

IDB. China also signed headline-catching agreements with Brazil to help finance

construction of extractive capacity in its new offshore Tupi fields, in return for a long-term

delivery contract once production comes onstream.5

All of this activity seems like the perfect storm for Latin America - loans without

international organization strings attached, a reliable customer for oil exports, and a

strident independence from North-South trading relationships. Of course, unless China

enters in sweetheart forward contracts or buys enough resources to distort markets, fears

that the US and China will clash over oil are misguided. But market power in oil importing

and buying creates strong political incentives to lock down supplies. This has already

begun to distort traditional power structures in the Middle East and is beginning to do so

as Latin America exports more to China.

At the same time, this trend is forging a new type of diplomatic pressure on Latin American

governments, and one where significant challenges have yet to be seen or understood.

Markets have mechanisms for dealing with countries that default on bonds or do not repay

loans to international organizations. Western governments have ways of punishing rogue

financial actors through established diplomatic and intergovernmental channels. But there

4 Cardenas, full text

5 Economist, Nov. 5, 2011 http://www.economist.com/node/21536570
http://www.economist.com/node/21536570http://www.economist.com/node/21536570


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is no established practice for countries that fall afoul of opaque arrangements with

Chinese state companies or with the Chinese development banks.6 And in a region where

national interests often conflict with international obligations, disputes may be inevitable.

North America deflecting a political reality to Latin America?

But these are very different disputes from those China has encountered elsewhere in the

hemisphere. In Canada and the United States, Chinas efforts have largely been beat back

proactively by domestic politics. While the Chinese have successfully invested in some oil

sands interests (through ConocoPhillips), but did so at a premium of nearly 100% of the

stakes assessed valuewhich would have made it difficult for the government to claim the

deal did not bring economic benefit to Canada.7 Things are not much different in the

United States. And although some Chinese companies have begun joint ventures in the

U.S. and Canada, Chinas record investing in North America has been spotty at best. Its

most famous war story came when CNOOC submitted an unexpected, all-cash bid for

Unocal in the midst of a planned takeover by Chevron. The generous offer, however, was

famously rebuffed by the U.S. Congress and more specifically the shadowy Committee on

Foreign Investment in the U.S. (CFIUS), who considered the transaction an undue

incursion by China in an area of U.S. national security.

But given failures elsewhere it appears they may be demanding some premium from

Chinese companies that want to operate in-country. Whether this is to compensate for the

political ramifications or the uncertainty of how to deal with Chinese NOCs in one of

Canadas most precious energy assets is unclear. Regardless of the reason why

6 Geoff Dyer, lecture at SAIS, Mar. 28, 2012

7 Hatcher (Houston Chronicle), http://www.chron.com/business/article/ConocoPhillips-selling-oil-sands-stake-1695317.php
http://www.chron.com/business/article/ConocoPhillips-selling-oil-sands-stake-1695317.phphttp://www.chron.com/business/article/ConocoPhillips-selling-oil-sands-stake-1695317.phphttp://www.chron.com/business/article/ConocoPhillips-selling-oil-sands-stake-1695317.phphttp://www.chron.com/business/article/ConocoPhillips-selling-oil-sands-stake-1695317.phphttp://www.chron.com/business/article/ConocoPhillips-selling-oil-sands-stake-1695317.php


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substantial alignment could not be attained, the Canadian and American governments

have been firm on its attitude towards national interest in large foreign resource

acquisitions, and Chinese NOC investments have not been given on par treatment with

those from elsewhere. In Latin America, the capital and the investment has been

welcomed, perhaps without the same political and practical scrutiny the Chinese NOCs

have faced from their northern neighbors. And perhaps when things start to go wrong, and

projects do not materialize, Chinese companies and the Chinese development bank might

yet learn the lessons Western investors have learned countless times in Latin America.

All oil is from a single barrel but how does it get there?

One reason for this dichotomy comes from the governance standards that vary widely

across the hemispheres oil industries. On one end of the spectrum is Canadian oil, which

is subject to some of the most rigorous regulation and oversight in the world. IHS CERA

concluded with the exception of Norway, Canada is the only major oil-exporting country

that scores highly on all measurements of civil, political, and economic freedom, including

the rights of women to full career, medical and travel choices; on media freedom, religious

freedom, and property rights, as well as on other measurements such as judicial

independence and relative freedom from corruption.8

One of Canadas most prominent commentators on the oil sands, Ezra Levant, has based

his central argument on the idea that the provenance of oil, the way it is found, produced,

bought, and sold is a human matter, and we can judge it against our cultures economic

and social values.9 Paul Wells, a respected columnist in Canadas leading newsweekly

8 In Americas Interest, Canadian Oil, Fraser Institute, http://www.fraserinstitute.org/research-news/display.aspx?id=17853

9 Ibid.
http://www.fraserinstitute.org/research-news/display.aspx?id=17853http://www.fraserinstitute.org/research-news/display.aspx?id=17853http://www.fraserinstitute.org/research-news/display.aspx?id=17853http://www.fraserinstitute.org/research-news/display.aspx?id=17853http://www.fraserinstitute.org/research-news/display.aspx?id=17853


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Macleans, summed up the new talking point this way: Levants thesis is simple enough:

compared to most of the worlds oil sources, northern Alberta is a veritable bastion of

stability, political enlightenment and environmental responsibility.10

With a view towards promoting market-oriented values in the oil market, exporting oil from

Canada to China implies a very different commercial relationship than with Latin America.

This is what makes Chinese oil imports from Canada a much different strategic issue than

imports from Venezuela, Ecuador, or even Brazil. Investing in Canada requires an

international standard of transparency and disclosure, and producing oil there implies a

standard that can easily stand up to American scrutiny.

The accountability gap does not just flow from China, however, as Latin American

governments are increasingly hostile towards the US and European oil companies

operating within their borders. Even standard bearers of responsible government and

stable policy like Brazil are beginning to demonstrate their antagonism to the old guard of

the supermajors. Brazilian prosecutors are mooting criminal charges against Chevron

executives after a small oil spill off the coast to Rio de Janeiro. This comes in addition to a

nearly US$12bn fine the government is trying to levy on the supermajor as a consequence

of the initial 3,000 barrel spillwhich may grow as oil continues to seep from the well.

And while Chris Garman from Eurasia Group told the Financial Times in March that the

legal challenges faced by Chevron and Transocean are much more about how

independent stakeholders have ridden a political firestorm which emerged from Chevrons

spill than about a growing anti-foreign or anti-IOC [international oil company] government

stance, the damage in some sense has been done. International news outlets have

reported on the Chevron executives passports being confiscated and demands by more

zealous officials to shut Chevrons operations entirely. When contrasted with the fact that

10 Macleans Magazine, Jan. 20, 2012, http://www2.macleans.ca/2012/01/20/crude-awakening/
http://www2.macleans.ca/2012/01/20/crude-awakening/http://www2.macleans.ca/2012/01/20/crude-awakening/


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Petrobras had more than 30 oil spill incidents in 2011, the alleged double standard

becomes even more evident.11 During an interview with Al Jazeera, Thomas Pyle from the

Institute for Energy Research concluded the move is sending a message that if youre not

Petrobras or not a NOC and you do business in Brazil, you may run the risk of this

inconsistent and hammering effect.

Another headline-grabbing incident is what is occurring with YPF and Repsol in Argentina.

Especially considering the Fernndez administrations muted reaction to investment from

major Chinese energy companies over the past several years, Repsol/YPF's future is a

clear indication of the hostilities private Western energy firms face in Argentina and more

widely in the region. The stage has been set either invest (even where it is not

economically viable) or suffer the consequences. Meanwhile Chinese firms, which offer

ancillary investment and sub-market rate financing, make it arguably more difficult for Latin

American governments to take similar action. But the action could also mask a more

delicate truth that given the new Chinese financing and investment paradigm, the pain of

international financial punishment and isolation from Western markets may not sting as

much anymore.

This is why, where China is concerned, the most successful Chinese joint ventures and

resource-based investments in the oil sector have taken place in non-OECD jurisdictions

and with companies that are not fully market-driven. Where Chinese NOCs have failed has

been in those with fully transparent vetting processes in more advanced economies.And

although there could be a selection bias with Chinese companies unwilling to get involved

in areas where they know they will face challenges, the message state companies are

sending is clear. Even if it is not credible, investee governments like Canada and the U.S.

11 Al-Jazeera English, Mar. 2012 http://www.youtube.com/watch?v=DH9XVeEEbAo
http://www.youtube.com/watch?v=DH9XVeEEbAohttp://www.youtube.com/watch?v=DH9XVeEEbAo


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believe Chinese NOCs operate best where local standards of governance, monitoring and

accountability are as flexible as Chinas own.

So then Latin America, much more than North America, stands at an important crossroads

between the two types of investment China has been making abroad. With few exceptions,

Latin American countries have much stronger institutions and more stable governments

than other recipients of Chinese inward investment. At the same time, there is enough

leeway in Latin American political and economic systems (including the presence of large,

state-owned resource companies) to broker deals with Chinese companies without much

external participation or democratic legitimacy. Without proper oversight or accountability,

deals like those struck between NOCs could become a detrimental factor in democratic

development in the hemisphere.

Estimated Chinese Share of Overseas Equity in Oil-Exporting Countries

Chart Credit: International Energy Agency


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Whats next?

When the CEO of Shell says in an interview with CNBC he has given up on predicting oil

prices, it is easy to conclude nothing is certain in global energy markets. At the same time,

the trend in macro demand is clearChinas demand is going up and the Wests demand is

flat. Supply trends are not so clear globally but in the Americas supply is clearly trending

upwards.

If the buoyant North American market dynamic was not enough to shift market dynamics in

the hemisphere, some of the worlds largest consumers of oil are exploring and forming

partnerships in Latin America with NOCs and as NOCs. With some of the largest reserves

also operating under the auspices of the state, the oil market could be moving towards a

new normal. In this world, the post-OPEC rules of governance and a de facto American

supervision over markets does not apply. Instead, governments broker deals with other

governments, and market forces are not the principal drivers of price and supply contracts.

And this is not just in the energy sector but also in the vast extractive sectors that have

driven the Asian trade relationships in the past decade. At a time when Latin America has

completed a democratic transition in a period of economic stability a feat unimaginable to

weary observers inside and outside the region where these trends lead the region could

raise thorny questions about the quality of democracy.

Combined with political theater unfriendly to Western/American interest like Chevrons

current experience in Brazil or Repsols experience in Argentina, European and North

American companies will feel increasingly squeezed out of what used to be a key market.

In the vacuum, Chinese state companies can invest heavily in extractive projects, and the

infrastructure that abuts them all at a low cost and in the coziness of a world of state

capitalism.


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A report put out this month by the Inter-American Dialogue concluded that Latin American

countries are beginning to see the U.S. as less and less relevant to their needsand with

declining capacity to propose and carry out strategies to deal with the issues that most

concern them. 12 The Economist, commenting on the report, worries further that the

American response will be tepid and unfocused at best, and that urgent work will be

neglected and useful opportunities missed, with potentially wretched long-term

consequences for the whole hemisphere.13

Regardless of the broader effects of Americas willingness to engage with the hemisphere,

energy is a key issue that has clearly escaped the control of American policymakers and

Western oil interests. It is a cruel irony that the North American energy renaissance, under

the banner of regional energy autonomy, may drive the United States to finally worry about

its standing in the region.

12 Inter-American Dialogue, http://www.thedialogue.org/.../IAD2012PolicyReportFINAL.pdf

13 Economist April 15, 2012, http://www.economist.com/node/21552587
http://www.economist.com/node/21552587http://www.economist.com/node/21552587http://www.thedialogue.org/.../IAD2012PolicyReportFINAL.pdfhttp://www.thedialogue.org/.../IAD2012PolicyReportFINAL.pdf

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