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Page added on October 30, 2012

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China Takes New Step in Canada’s Oil Sands


China is cementing its Canadian energy ambitions with a commitment to a new $3-billion pipeline that would carry oil sands crude south. (The U.S. and Canadian dollars are trading at roughly parity.)

Phoenix Energy Holdings Ltd., the Canadian subsidiary of PetroChina Co. Ltd., is partnering with TransCanada Corp. to build a 900,000 barrel-a-day project, called the Grand Rapids Pipeline System, 500 kilometres from northwest of Fort McMurray to Fort Saskatchewan, near Edmonton.

The pipeline is the latest move by Chinese companies into the Canadian oil sector, and shows the maturing work of those firms in Canada, which are moving past acquisitions into building oil production. PetroChina has been joined in a multibillion-dollar oil sands acquisition spree by China Petroleum & Chemical Corp. and CNOOC Ltd., which has struck a $15.1-billion deal to acquire Nexen Inc. and is awaiting government approval for the deal.

Though a route for the pipeline has yet to be selected, it’s expected it will carry oil from the MacKay River and Dover projects that PetroChina has largely secured from Athabasca Oil Corp.

“It’s a pretty big commitment by PetroChina – shows that they’re here to stay in the oil sands,” said Chad Friess, an analyst with UBS.

The 50-50 partnership gives PetroChina the opportunity to secure a pipeline to an area of the oil sands where there is little current production, while TransCanada operates the project.

“It’s a good marriage working with them,” said Frank Lai, Phoenix vice-president of corporate development.

PetroChina wanted partial ownership of the project to ensure it is built, since the company needs pipe to carry away production expected to start in 2015. PetroChina can provide its “expertise to make sure the project is going well, is going on schedule and on budget,” Mr. Lai said.

He added that other pipelines have been built with a similar model, in which the oil company eventually sells its interest back to the pipeline company. It’s not yet clear whether PetroChina will take that step, he said.

Though there are potential Chinese ownership interests in the proposed Northern Gateway pipeline to the West Coast, the Grand Rapids system stands to be the first major pipeline in Canada partially owned by Chinese interests.

It will serve an area of the western oil sands that has seen substantial exploration but has, to date, seen little production. Companies with land in the area include Laricina Energy Ltd., Cenovus Energy Inc. and PetroChina, which is building the first 35,000 barrels a day of its MacKay River project, and is still waiting to secure regulatory approval to the Dover project it jointly owns with Athabasca Oil Corp. Those two projects are expected to ultimately produce 400,000 barrels per day, and PetroChina has been expected to assume full ownership of Dover later this year.

TransCanada says the Grand Rapids system could be built by 2017. PetroChina can truck its oil before then. It will be a dual pipeline system with one line capable of carrying 900,000 barrels per day of oil south. A second line will carry north 330,000 barrels per day of diluent, the product that is used as a thinner so the heavy oil sands crude can flow in pipelines.

Though PetroChina envisions only 400,000 barrels a day, it will need 600,000 barrels per day of pipeline space, given that its heavy product must be mixed with diluent. The remaining capacity could be accessed by other companies in the area, Mr. Lai said.

But it’s clear PetroChina’s oil commitments are essentially to underwrite the pipeline system’s costs.

“They bring the anchor volumes. We bring the pipeline expertise,” said Paul Miller, senior vice-president of oil pipelines with TransCanada.

Grand Rapids will be the first pipeline into the western area of the oil sands, and Mr. Miller acknowledges that “some of those lands are in early stages. But we view the entire Athabasca region as the marketplace for Grand Rapids,” he said.

The oil pipeline comes as TransCanada, traditionally a natural gas pipeline company, moves ever more aggressively into the oil pipeline business once dominated by competitor Enbridge Inc. It began with its Keystone pipeline into the U.S. midwest; TransCanada is also working to build its Keystone XL line down to the U.S. Gulf Coast. Building Grand Rapids will allow the company to own pipe stretching directly from oil wells to oil refineries.

“We have this vision of moving the supplies from production to market,” Mr. Miller said. “Sometimes the pieces don’t come together sequentially. Sometimes you have to deal with the market end first,” as with Keystone.

With Grand Rapids, he added, “we’re dealing with the supply end.”

Globe and Mail, WSJ

5 Comments on "China Takes New Step in Canada’s Oil Sands"

  1. BillT on Tue, 30th Oct 2012 2:32 pm 

    And if the Keystone is never built? Sounds like counting chickens before they are hatched, or in this case, even before the eggs are laid. 2017 is a long way down the road in a failing economy.

  2. BillT on Tue, 30th Oct 2012 2:41 pm 

    BTW: $3 billion is nothing to China. They hold more than $1,114,000,000,000.00 of our debt and are collecting about $300,000,000,000.00 in interest each year from the US Treasury. So they could build 100 of those pipelines every year and they will be paid for by the US taxpayer. And the oil will go to China.

  3. foxv on Tue, 30th Oct 2012 3:44 pm 

    This is funny. China needs energy so China buys Canadain oil plays. China builds a new (double capacity) pipe line…. China sends the oil to the US?

    This is a precursor to the Northern Gateway (Alberta – B.C.) pipeline (which I support). TransCanada may find its XL dreams (which I don’t support) dashed; or at least china’s support for; if the Northern Gateway is given the go ahead.

  4. DC on Tue, 30th Oct 2012 6:24 pm 

    Northern Spillway isnt going to happen. If they try, there will be massive protests all along the route. The Indians are already against it, and the media loves protesting indians. A majority of BC residents oppose it as well. No one trusts Enbridge, despite their bought and paid for federal politicans and rigged Gallup polls.

  5. Kenz300 on Wed, 31st Oct 2012 1:56 pm 

    China makes long term plans…….

    Most businesses and politicians are worried about quarterly profits or the next election and do not plan long term.

    I’m betting on long term planning.

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