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Sludging toward Edmonton (and Calgary)

During the years leading up to its 100th birthday this summer, Canada's oil-rich but landlocked and out-of-the-way province of Alberta was a geopolitical lacuna.

During the years leading up to its 100th birthday this summer, Canada's oil-rich but landlocked and out-of-the-way province of Alberta was a geopolitical lacuna. But that was before the U.S. was hit by $70-a-barrel oil, Hurricane Katrina and a fresh wave of energy insecurity. Suddenly, droves of oil executives, investment bankers and diplomats are descending on Calgary and Edmonton. U.S. Treasury Secretary John Snow paid a visit in July, and Vice President Dick Cheney was scheduled to drop by in September, until Katrina canceled his plans.

The U.S. interest was likely precipitated by the purchase of stakes in two Canadian oil sands projects by Chinese companies, along with agreement on a $2.1 billion pipeline from Alberta to British Columbia's west coast for oil that will be shipped to Asia. The deals were made at about the same time that Chinese oil company CNOOC made a failed attempt to buy California's Unocal. China's investments in Canada have been relatively minor, says analyst Roland George of energy consulting firm Purvin & Gertz. But, he adds, "China is also showing a high interest in taking a bigger position."

It's that sort of talk that scares the Americans, who look to Canada to fill a growing portion of their energy needs. To a certain extent, says George, the U.S. reaction is a case of "'How can Canada talk to the Communists?' But mostly, they just want the oil."

That the oil is there no one doubts. Alberta's recoverable reserves of some 170 billion barrels are estimated to be second only to those of Saudi Arabia. But oil sands sludge costs as much as $20 a barrel to extract; pioneers like Suncor and Syncrude took real risks when they began investing during the 1960s and the 1970s oil shock, respectively.

Suncor, which has a $26 billion market cap, has been fingered for a possible takeover. In the short term, however, the $1.1 billion August purchase of Calgary-based project developer Deer Creek Energy by France's Total is closer to the typical size of deals expected for the few acquisition targets currently available, says Salman Partners analyst Kyle Preston. As with 80 percent of oil sands properties, Deer Creek's reserves must be extracted using technologies still being perfected. "There is essentially zero geological risk. It's all project-execution risk," says Preston.

Certainly, energy was on the agenda when Chinese President Hu Jintao met with Canadian Prime Minister Paul Martin in mid-September. With polls showing Canadians feeling hugely betrayed by their American trading partner following recent disputes about softwood lumber and beef, Martin is conscious of the need to develop new markets. Ottawa and Beijing have had cordial trade relations since the 1960s, and there are 1 million Chinese immigrants living in Canada.

If the Asian giant wants to sate energy needs that are growing by 4.3 percent a year with more oil sands acquisitions, don't count on Canadians to object.