[ROCKMAN]

Just found a story that highlights why Chai-T might deserve its own section that can be periodically updated as new aspects develop. Chai-T (Chinese Hydrocarbon Acquisition Initiative - Total) is an acronym some clown came up to describe China’s effort to lock up current, and more important, future oil reserves. The effect is similar to that of ELM: it doesn’t reduce the amount of oil produced but does decrease the amount of oil available to purchase in the open market place. This will include oil reserves they buy in the ground, long term oil purchase contracts, rights of first refusal they might acquire as part of a loan structures and reserve commitments to refinery JV’s they develop with oil exporting countries.

What brought this to mind today is something I’ve wondered about for a while. Given the hundreds of $billions China has committed to such projects just how deep are their pockets and are these efforts sustainable? Now we have a measure. From: http://www.libertynewsonline.com/article_301_29547.php

“China's foreign-exchange reserves have increased to a record $2.648 trillion. China's foreign-exchange reserves top $2.5 trillion Last Thursday, the Wall Street Journal announced China's "reserves, already by far the largest such stash in the world, jumped by $194 billion in the third quarter, making their biggest-ever quarter gain."

Along those lines: Jun 23, 2013 - China's Sinopec Group has agreed to buy Marathon Oil Corp's Angolan offshore oil and gas field for $1.52 billion. Wow – they just blew 0.06% of their cash on this one deal…crazy rich kids. LOL. China already owns a good bit of Angolan reserves. Now recall that China has plans to build the largest oil refinery on the entire African continent in South Africa. A country with little oil reserves but sits just down the coast a short sail from Angola. Just one more small brick in the Chia-T wall.

And China offering a $15 billion loan to build a refinery in British Columbia to crack oil sands production. Dang...that would use up another 0.6% of their stash. Of course, that does represent only 9 days of net cash income they made in the third quarter. And folks might wonder why ExxonMobil isn't out their competing with China to buy oil assets. XOM plans to spend $185 billion OVER THE NEXT 5 YEARS. Or a little less than less than China gained in currency in 3 months. IOW China could spend in 3 months what XOM plans to spend in 60 months and not have to dip into their reserve for one $ more than they are making right now. It would be like XOM sitting in a poker game with $500 of chips with the ante being $1,000 per hand.

[dbruning]

And China offering a $15 billion loan to build a refinery in British Columbia

Screw that. if we're going to sell out and accept the potential damage and risks of that refinery, they can dang well pay for it up front. No loan, a gift from the people that will benefit from that refinery. It's not like my children will.

[dbruning]

Jump forward in time. China has lowered/depleted it's huge cash reserves of US fiat currency on acquiring ownership or control on a big percentage of available oil production (already in motion). Possibly farmland, mines, other raw resources (like they are doing in Africa right now). And let's say they have in the last few years built up an exceptionally modern, well equipped standing army, complete with hardened underground command structures, etc. (I don't know for sure, but I would be horrendously surprised if that wasn't already in play now...)

Now suppose they decide that the oil they control should flow to China and little of it to the US/Rest of the World. Possibly due to global lowering production rates, or due to whatever reason they chose to give. I think we can all agree that such a situation would be unacceptable to US interests, and citizens would demand action was taken to fix this problem (not necessarily the Chinese hoarding all of the oil, but instead the outrageous prices at the pump).

The question I'd like to see honestly answered is this: In such a situation, what steps can be taken to fix the situation without escalation into war?

The reason I ask is that I can absolutely see the scenario I'm laying out happening. The Chinese have a huge stockpile of US dollars - which are at risk of depreciating in value. Naturally they are exchanging US Dollars for ownership and control of essential resources. I believe there will come a time when oil production declines, food production is unable to maintain current levels due to aquifer deletion, etc, and the world is hurting for natural resources even more than it is now. Population growth + depletion WILL ensure there isn't enough to go around; even worse than now.

We shouldn't blame China for looking ahead and looking to the needs of it's people in the future - the long game is something China has always been good at.

What we should be wondering is: What are our governments doing to protect their people for the future?

[ROCKMAN]

Bruning – Well said. I was hoping such a thoughtful response would be mustered on this topic. Despite the sill acronym I think this is one of the most serious aspects of the POD. A world of declining energy production as a result of geology would be painful but who could the public blame? Well, the energy companies and the politicians come to mind. But most would understand how impotent those forces would be against Mother Earth.

OTOH when they are deprived of energy yet watch another society prosper with sufficient supply they would have an easy solution: take it from them. First, by using whatever financial or political advantage we might have. But if that isn’t sufficient? I can’t predict the future but I see little possibility of China and the US coming to a physical confrontation. Given nuclear capabilities it’s not difficult to see either side resorting to such a level of destruction even if they were to anticipate their complete failure in such an energy war. I think it equally unlikely for any force to attempt to interfere with energy flow to any of the super powers.

But energy will be flowing to countries that aren’t capable of such military capabilities. I know it sounds absurd but the reality is simple: pick such an importing country (Ireland for instance) or any other country that fits the description. How could they stop the US from redirecting energy sources to them? Would the US people tolerate such aggressive action by our govt? Would they actually demand it over some renewed sense of manifest destiny?
Granted this is a very hypothetical question but unless the world suddenly develops alts and levels of efficiency that avoids such a situation some dynamic will take shape.

Thus another made-up concept: MADOR...Mutually Assured Distribution Of Resources. Some method that will allow the super powers to acquire their commodity needs without a conflict developing directly between them.

Again, all hypothetical except for that fact that it seems inevitable that there will not be enough resources for everyone in the future. And to answer your question the US govt is doing little of significance to protect the future of our people IMHO.

[ROCKMAN]

Lots of media reports about the US trade deficit with China. Not as much on the global perspective. While we have the largest deficit of any country we aren’t the only one funding China’s war chest. This is the best detail I could find on their global trade surplus. From: http://arabnews.com/china-trade-surplus-surges-48-231bn

“China's trade surplus surged in 2012, but total imports and exports grew slowly owing to weakness at home and abroad. The trade surplus in the world's second-largest economy jumped 48.1 percent from the year before to a four-year high of $231.1 billion. The increase was largely due to low growth in imports as a result of commodity prices declining last year. Total imports increased just 4.3 percent to $1.82 trillion, while exports rose 7.9 percent to $2.05 trillion.

And China's total trade grew just 6.2 percent last year, well below the government target of about 10 percent. A spokesman told reporters that "a sharply slowing world economic recovery, weak international market demand and rather big downside pressure on the domestic economy" weighed on the results.”

Which may indicate a delicate balancing act: if China pulls too much oil from the global market place demand reduction for their products would hurt their enviable trade imbalance.

“China's economic growth slowed for seven straight quarters to the end of September, while the broader global economy also faced weakness in 2012. Data for the three months to the end of December are due at the weekend, while inflation figures will be released today. The European Union, China's biggest trade partner, continued to suffer a prolonged debt crisis, and economic recovery in the United States, Beijing's number two commercial counterpart, remained subdued

The jump in the trade surplus was mostly a result of better terms of trade due to lower commodity prices, an RBS economist said. One bright spot was that exports and imports hit new single-month highs in December, rising 14.1 percent to $199.2 billion and six percent to $167.6 billion respectively, the figures showed. Analysts, however, attributed the strong performance largely to one-off factors including better US data in the fourth quarter and rushed shipments by Chinese exporters at the year-end.”

I take that last statement to mean the obvious: a stronger US economy is helping boost China’s export business. Thus the concept of MADOR may apply: while China is planning well to compete with the other industrialized economies if the damage the economies of the larger trading partners by reducing oil availability to them they’ll pay for it with reduced exports. Which would be good for the US and EU if China allowed sufficient energy to move to those economies. And what of those economies that import oil but little of China’s production? Little reason for China to provide oil or refined products to them.

[ROCKMAN]

bruning – “…if we're going to sell out and accept the potential damage and risks of that refinery, they can dang well pay for it up front. No loan, a gift from the people that will benefit from that refinery. It's not like my children will.”

The refinery will be built by Canadian, owned by Canadians, manned by Canadians and will refine Canadian oil. So I would say whatever damages might occur are 100% on the backs of the Canadians. I suppose it depends on who “we” are. Are you a citizen of Alberta or BC? If so your kids will benefit from higher taxes from the refinery. And the Canadian investors will reap the profits. It could be worse: the Chinese might pay for the plant and get all the profits but at least there would still be the tax income. And it could be worse than that if they build it in another country that might give them a tax break. And thus no taxes from the refinery and yet all the risk of shipping so much oil out of Canadian harbors.

As has been said many times: be careful what you wish for...you might get it.

[Paulo1]

Rocky,

I have commented several times over on TOD that there will never be a Northern Gateway pipeline pumping bitumen to the BC coast. There are scant treaties signed with BC natives, and the pace of talks are glacial with lots of mistrust. Further to that the Haida will blockade tanker traffic. As for enviromental protests all I can say is that even though I am a person who has made his living in support of resource extraction for the last 40 years, I would be very willing to donate time and money to stopping Northern Gateway. The Queen of the North sinking by Hartley Bay pretty much laid waste to the idea that "it can't happen here or ever again", (another Exxon Valdez), and the idea that now things are much safer and companies are more responsible is a tanker load of crap pushed by people who don't live here.

Our Province is littered with old mines leaking poisonous heavy metals into the environment...sterilizing entire river systems. I live 60 miles from one such site...the old Mt Washington mine. No one actually believes there will be responsible parties around to clean up any mess. Macondo cleanup expensive? Hell, charter a floatplane and fly up the coast and you will see the meaning of the words 'expensive', 'fraught', and 'dumb'.

I can see a revamped Kinder Morgan to Burrard Inlet, but the size and scope probably won't be the 10X bandied about these days. Further to this, one or two more pipeline 'mishaps' will put that idea to bed as well.

LNG? This will be the focus going forward. When is Keystone decision to be announced in your estimation? Any ideas on this? With WTI over $100...what's wrong with selling production to our friends and neighbours to the south? Don't we owe a country we have relied on to 'have our backs' first dibs on energy options? Why should production go to the Chinese if US consumers will be paying world prices, eventually....(and probably be doing so long before any refinery could be built in Kitimat). Canadian production does not ever need to be shipped to China if US customers match price.

regards....Paulo (BC resident and estuary living west coaster)

[ROCKMAN]

Paulo – You’re in the heart of it so we’ll depend upon you for the bottom line. The oil p/l certainly sounds iffy. But from what I read the refinery and shipping the products to the coast for export appears much more viable given local support. But that’s just what I read so you may have a better instinct. But I’ve read that both Kitimat (big tax break) and the BC govt are supporting the idea.

As far as export of products to China if the refinery is built it wouldn’t surprise me if the products went to CA first. Might be where the best profit can be had. OTOH if China has a right of first refusal that dynamic might not persist for ever.

As far as timing of the Keystone XL P/L border crossing permit I don’t feel that’s at all relevant. Check my recent conversations with Graeme on the subject. Record breaking amounts of oil have been coming across the border without the permit. The choke point at Cushing, which was the hindrance to oil sand development, is in the process of being completely eliminated…with the full verbal support of President Obama. Remember 98% of the KXL P/L system does not require POTUS approval and has been under construction for some time.

[Paulo1]

Hi again Rockman,

I reread my post and apologize for the strident tone. The BC Govt is desperate for new revenue as our local economy mimics the World's....in other words, there just doesn't seem to be enough money and everyone wants a return to the 'good ole days'. I don't think our local politicians understand that there is refinery over capacity right now, nor do they appreciate the huge costs and long time frame for new construction. Locally, a shut down pulpmill was purchased by Brookside? from Calgary, renamed the site Discovery LNG, put up a big sign, and has applied for review and process to build an export facility. There is a co-gen site right next door, but I am not sure if the line itself can deliver the volumes for the process? Plus, a few years ago the idea of an LNG plant was proposed for Texada Island off Powell River and the area went balistic in opposition. People are hungrier now so this proposal might have a better chance.

Paulo

[ROCKMAN]

Paulo - Strident? Sorry buddy...I've been a petroleum geologist for 38 years. I hardly notice getting slapped upside the head verbally. Strident...that's a freaking walk in the park. LOL.

You're going to be a great resource for us on this subject. You obviously understand the downside but also see the local economic pressures. I know it’s a bit of a cheap shot but it's very easy for someone on the other side of the world to criticize activities in Alberta or BC…they have no financial skin in the game. As I've pointed out completely shutting down the oil sand development would benefit me financially. But I'm just not that selfish to criticize the Canadians doing what they feel they need to do to support their economy. I’ve got a simple solution: all the countries that disagree with the Canadians should pay them what they are making from the oil sales. And then down the road when those countries are desperate for oil the Canadians can repay in kind. That is if those countries think it would be appropriate to produce the oil sands at that time.

Sounds fair to me: share the bounty…share the pain

[dbruning]

Hey Rockman,

I'm down in Victoria, on Vancouver Island - capital of BC...we were in the news recently with some semi-locals deciding Canada Day was a good time to try to blow our parliament into bite sized chunks.

You're right that the refinery would mean jobs and taxes the province could sorely use. So there would be financial benefits.

The people I talk with are conflicted, they want the money but are seriously worried about long term environmental impacts. Even with the absolute best of intentions, world class technology and a mandate to build everything as rock solid as possible, we've seen that accidents happen. And of course, the facilities would be built by the minimum bid companies looking for profits, which means possible construction shortcuts. And overseen by government agencies / politicians - who I don't really trust to decline the "it's not a bribe, it's just a new car,house,boat,suitcase full of money" and keep everything honest.
Wait, I just used politicians and honest in the same sentence...*grin*

If I had to guess on the results of a population wide vote, I'd say the project would go through... After the required interests were bought off and considerable delays had occurred. What do you think Paulo?

[ROCKMAN]

bruning – Yep…conflicted interests far and wide. Consider the long string of refineries and chemical plants along the Miss. River from New Orleans to Baton Rouge. The bitter sweet local nickname: Bhopal on the bayou. You can even find that bumper sticker. Sometimes situations are so bad all you can do is laugh to get through the day. And consider how heart broken families were with the 11 burning to death on the Macondo blow out. And the next morning watched husbands and dads head back offshore. One of the dead was the nephew of one of my consultants that had to help his sister deal with the loss while he was back out on a drill rig on his next hitch. And no…I don’t go to memorial services anymore. Too late then.

I know it sounds cold but long ago we developed a philosophy in the oil patch probably shared with other risky endeavors like firemen: Grieve…then shut up and get back to work. I’ve had such conversations more times than I care to remember. You either accept the risks or find another profession. There’s really no in-between position to take. Such is the situation you folks face.

So shut the f*ck up and get to it…whether “it” is for or against the oil sands development and refining. LOL. Buena suerte, amigo

[Subjectivist]

Ha I thought this thread was about the tasty herbal tea, not geopolitics!

[Keith_McClary]

How could they stop the US from redirecting energy sources to them? Would the US people tolerate such aggressive action by our govt? Would they actually demand it over some renewed sense of manifest destiny?

They invaded Iraq and cancelled contracts with Russia and China (international law be damned). They could do that sort of thing again with a different pretext and spin.

[ROCKMAN]

Keith - Having spent 62 years living in hurricane alley I've lived through a number of mini and relatively minor events when compared to the worst PO may deliver. Lost of examples of generous and level headed responses. But a fair number at the other extreme. IMHO we've never really had a severe crisis in this country. Hurricanes and sub-prime were very bad for lots of folks. But not everyone at once.

[ROCKMAN]

Trouble in River City: Costa Rica Halts $1.3 Billion China-Funded Refinery Plan. Not sure if this a real blow up or just a renegotiation ploy:

“A feasibility study on the refinery modernization was conducted by Chinese company HQCEC, which has ties to China National Petroleum Corp., or CNPC, the comptroller general’s office said yesterday in a statement on its website. The terms of the contract specified that the study couldn’t be carried out by a company associated with CNPC, which is partnering with the Costa Rican state oil company, or Recope, on the project, the comptroller general’s office said. Calls and e-mails to CNPC spokesmen in Beijing weren’t immediately returned.”

And oddly: “Recope President Jorge Villalobos Clare resigned following the decision, newspaper La Nacion reported.” So the Chinese got their hand slapped and a Costa Rican resigns?

[ROCKMAN]

China State-Owned Oil Monopoly System to Slowly Change

BTW Chai-T is the cutesy name for the ongoing process of China tying up future oil production (and thus removing it from the market place) by various methods.

From: http://www.energytribune.com/77959/chin ... PV6Ge.dpbs

Not a lot of facts but highlights the report of a Chinese think tank that’s critical of the “inefficiency” of the Chinese energy industry as a result of the monopolistic nature of their system. For instance there are a number of privately owned refineries in China but they aren’t allowed to import oil directly. If they need oil beyond local supplies they have to acquire it from the government companies. Likewise other energy infrastructure projects move slowly as a result of the bureaucracy.

A taste of the article: “Considering the size of China’s state-owned companies (particularly its oil majors) that are some of the largest companies in the world, and the history of economic and regulatory development in China, (which is after all still a communist country with strict top down economic planning by Beijing), these developments are encouraging. Hopefully, in time they will lead to greater marketization and even a purer form of capitalism”

Great…just what the world needs. China is currently running circles around the rest of the oil importing economies by locking up future oil production with their “inefficient” yet powerful and very well financed system. And in the future they may be able to morph those powerful weapons in with the efficiency of an ExxonMobil style operation by turning lose their currently inhibited entrepreneurial class.

Imagine that for a moment: an ExxonMobil with $trillions in cash reserves, absolute control of the regulatory system, the power of sovereign guarantees, strong diplomatic and economic ties with all the major energy producing governments and the full support of the citizens (who don’t really have a choice in the matter). And, of course, one of the largest military forces on the planet armed including nuclear weapons. LOL.

Many folks might not like XOM-USA but think about an XOM-PRC. That could make for some sleepless nights.

And one more current post indicating major structural changes as a result of Chai-T:

European refineries are seeing their bills soar by billions of dollars a year as Russia shifts oil exports to Asia, driving up the values of Urals, one of their preferred crudes. Huge volumes have switched away from saturated European markets. From virtually zero five years ago, Russia’s oil exports to China and the Pacific coast have risen to 750,000 bpd or 17% of its total, and they are set to double in the next five years.

The move has proven to be a double win for Present Vladimir Putin, who back in 2005 asked his ministers to explain why Urals sold at a discount of $5-$6 per barrel to the European benchmark Brent. At the time, most industry experts laughed at the remark, saying Putin should go no further than the quality of Urals, which is much inferior to Brent.

Fast forward eight years and Urals barely ever trades at discounts of more than $2 to Brent and often spikes to a premium, including an all-time high of $0.90 per barrel reached this week. Russia, the world’s second-largest oil exporter after Saudi Arabia, is shipping around 3.5mn bpd to Europe. Any $1 per barrel upward move in Urals relative to Brent means an extra cost of $1.2bn a year for European refiners. The difference in values versus 2005 could exceed $5bn a year.

And now add NG to potential trouble for the EU. Russia has already been tough on NG consumers in the region. And now new pipeline systems are being built that will allow China to directly compete with EU consumers giving Russia more leverage then it already has.

[ROCKMAN]

Finally found a number at Bloomberg as to just how big China’s war chest is: $3.5 TRILLION

“China Investment Corp., created to manage part of the nation’s $3.5 trillion of foreign-currency reserves, reported a 10.6 percent return on its overseas investments last year as global equities rallied.”

The portion that the CIC manages is the sovereign wealth fund.

“Net income at the $575 billion sovereign wealth fund, which also holds the government’s stakes in China’s biggest banks, rose to $77.4 billion from $48.4 billion in 2011, Beijing-based CIC said in its annual report yesterday. Its overseas investment returns compared with a 4.3 percent loss in 2011 amid declines in global commodity prices…The U.S. accounted for 49.2 percent of CIC’s diversified equity investments as of Dec. 31, while emerging markets made up 23 percent, report showed. Financials made up 22.3 percent of such holdings, up from 19 percent in 2011.”

Perhaps another reason that China would like to see the US maintain enough oil imports to sustain our economy. At least until they decide to start shorting US investments. But I don’t think they would. They still need our consumers healthy enough to keep buying their exports. Last year alone China gained almost $1 trillion in net trade balance with the world. Even if China has committed $800 billion to their various oil acquisition efforts including all those new refineries it would still only represent about 20% of their foreign-currency reserve. A reserve they add about $600 to $800 billion per year to these days. No one is going to compete with China for any oil reserves on a monetary basis…no one.

[ROCKMAN]

One more little brick in the Chai-T wall: CNOOC Eyes Uganda Oil Refinery
From: http://www.downstreamtoday.com/news/art ... a_id=40107

“July 18, 2013. The China National Offshore Oil Corporation (CNOOC) has expressed interest in investing in Ugandas oil refinery. The Chinese State-owned company, expressed interest in the project following meetings with the company chairman Mr. Wang Yilin and Prime Minister, Amama Mbabazi, in Beijing last week. Referring to Uganda's nascent oil and gas sector in a statement, Mr. Yilin said it would lay a better foundation for other industrial efforts. Mr. Mbabazi said: Our desire is not just revenues but achievement of the strategic objectives of transformation, and we needed people that could be reliable and trusted.”

That magic word, “transformation”, more and more oil exporters are using. Replacing oil exports and product imports with more internal refining and lesser amounts of oil going to the open market.