Asia's growing economies, particularly in China and India, will require securing resources for energy requirements. The Canadian government is currently reviewing the proposed takeover of the oil sands giant Nexen by the Chinese state-owned company CNOOC.
The review puts the Canadian government in a Catch-22 situation. On the one hand, it has been warned by by the Canadian spy agency CSIS that a Chinese takeover could jeopardize national security, while on the other hand increasing cost for development cannot be covered without foreign investment.
The Alberta Oils Sands play a large part in fueling the Canadian economy, providing high-salary union jobs. It has also created a labor shortage, fueling higher wages. As an example, in Canada's oil capital Calgary, oil producers pay a secretary about $50,000, while a small business can only afford in the neighbourhood of $30,000.
The Harper government has been touting its efforts for trade with Asia, but, in the case of Nexen, Canadians are skeptical. There is the concern for national security, but also a concern for a sell-out to China.
CNOOC has promised to list the stock on Canada's stock exchange, TXE, keep its headquarters in Calgary and retain the present management.
The Alberta Oil Sands are a victim of their success
Major development of the oil sands started under the progressive conservative government of Peter Lougheed in the early 70s. Lougheed took on Prime Minister Trudeau's National Energy Province and with successful negotiations attained a fair share of revenue for Albertans.
The high cost of development have taken a toll, though, each time the global price of oil has dropped. Current prices per barrel of oil cover the costs, but the expenditures could easily erase any profits should oil prices drop. High labor costs and shortage of labor drives many North American investors away. Canadian investors can't cover the costs, nor are they in a position to take the risk.
For China's state owned CNOOC it is not all about profit, it is also about securing guaranteed supplies of oil to fuel its exploding economic growth. Rapidly rising costs for oil sands development have driven down stock prices for some Canadian energy companies, making them an easy target for takeover.
As an example in Alberta, top earners make in excess of $600,000, while the remainder of the country tops out at approximately $300,000.
Chinese Takeover of the Oil Sands
While there have been other acquisitions by Chines companies, Petro China and the China Investment Corp., these takeovers have not been met by the firestorm the Nexen deal is receiving.
The Nexen acquisition would give China another 7 percent piece of the pie. The concern for many Canadians, including conservatives and half of Albertans, is that China could buy up large swaths of the Alberta Oil Sands. The concern, of course, is real, and it is unimaginable that a foreign country would control oil sands development.
The Chinese labor and environmental record is not exactly plauable, which would be another concern. As a result, strict rules that are enforceable would have to be part of any deal.
The continued success of oil sands development is dependent on globa oil prices and in large part on investors willing to take the risk in a volatile market. China needs the energy to fuel its growing economy, but one cannot ignore the national security risks associated with a Chinese takeover.
Most of the oil produced in Alberta is upgraded to remove bitumen and refined in American refineries. Canada should have a larger share in upgrading and refining its product. At the present, crude is sold to the US at a discount price and exports jobs to the US.
The Harper government would be hard pressed not to approve the CNOOC takeover. With the uncertainty of the XL Keystone and Northern Gateway pipeline, a major problem would be bringing Alberta crude to markets. The XL Keystone pipeline will probably proceed after the election, but the Northern Gateway Pipeline, given the opposition by, will be a harder nut to crack.
Any approval of the CNOOC/Nexen deal must be accompanied by guarantees and certain conditions on the Chinese state-owned company. These should include Canadian control of the resource, application of environmental rules and labor laws and consideration of aboriginal rights, including employment of aboriginals.
The Canadian government should also insist on the establishment of upgraders and refineries on Canadian soil. Canada and Alberta cannot afford to render control of the Alberta Oil Sands to China.
It is a global market and as such the Chinese are playing a large part of it. If CNOOK were a private and not a state owned company, it would probably be approved without question. Given China's past record, it is wise to move carefully on the takeover. Guarantees need to be in place.