Harper Builds Oil Link With China After Obama Keystone 'Slap'

Prime Minister Stephen Harper is gaining support among Canadians for his plan to ship oilsands crude to China after President Barack Obama rejected TransCanada Corp.'s $7 billion Keystone XL pipeline to the U.S. Gulf Coast.

Harper will meet President Hu Jintao in China next month, when he may tout Enbridge Inc.'s proposed Northern Gateway pipeline that would let crude flow to Asia from Alberta's oilsands via a Canadian port.

"The Keystone decision was a slap in the face to Canada and it's making Canadians rethink the relationship," said Jack Mintz, head of the School of Public Policy at the University of Calgary. "Harper probably wants to put out a sign that we're open for business for Asia."

Harper is pushing energy exports to Asia to reduce the country's reliance on the U.S. and make Canada a global energy "superpower." Tapping markets in Asia may raise the price received by Canadian producers by $13.60 a barrel by 2030, according to a University of Calgary study. About 99 percent of Canada's crude exports go the U.S.

"The Keystone ruling shows that we need to diversify away from the U.S. to Asia," Richard Waugh, chief executive officer of Bank of Nova Scotia, the country's third-biggest bank, said in an interview. "The Prime Minister appreciates that and it is no doubt a key purpose of his trip" to China.

'Profound Disappointment'

Harper expressed his "profound disappointment" Jan. 19 after the U.S. rejected Keystone, telling Obama that Canada will "continue to work to diversify its energy exports," according to details provided by Harper's office.

Efforts to boost support for selling oil to China may be having an impact. Opposition to the Northern Gateway pipeline has weakened in recent weeks, according to a survey by Toronto- based Forum Research.

The share of Canadians who oppose the plan has fallen to 43 percent in a poll conducted Jan. 13, down from 51 percent in a December survey. Support for the project increased to 37 percent from 35 percent. The percentage of those who say they are unsure rose to 20 percent from 15 percent. The poll of 1,211 Canadians has a margin of error of 2.8 percent.

"It looks like a group of people are giving it a second look," Lorne Bozinoff, president of Forum Research, said in a telephone interview, adding Harper may have "got people thinking."

Other Canadian policy makers, including Bank of Canada Governor Mark Carney, have said Canada will need to increase its exports to emerging markets.

'Tremendous Opportunity'

"If you look at the nature of the U.S. recovery right now, our exports are $30 billion lower than they otherwise would be," Carney said in a Jan. 22 interview on CTV Television's Question Period. "The Chinese market is a tremendous opportunity for Canada. We're under-represented there relative to other countries."

Canada's benchmark stock index lagged behind the S&P 500 last year for the first time since 2003, as producers of raw materials and energy dropped on concern that slow global growth will limit demand for commodities and erode their prices. The industries make up about 47 percent of Canadian equities by market value, according to data compiled by Bloomberg.

Alberta Premier Alison Redford reacted to Obama's announcement by saying the province will now focus on opening markets in the Asia-Pacific region. Asia is Alberta's second- largest export market, accounting for about 10 percent of C$78 billion ($77.2 billion) in total exports in 2010.

'Horrible Precedent'

Canada has already begun regulatory hearings on Enbridge's proposed Northern Gateway pipeline. CEO Pat Daniel said the U.S. rejection was "horrible for our industry and it's a horrible precedent. It will only embolden those opposed to Gateway and other new project developments."

Canada "can continue to be supportive as they always have" on Northern Gateway, Daniel said Jan. 19 at a conference in Whistler, British Columbia. The federal government has "done a good job calling out the issues around the regulatory process."

Harper has said building the capacity to sell the country's oil to Asian markets is in the national interest, and the government will aim to speed the regulatory-approval process for large energy projects. Harper has also said "foreign money" from environmental groups is being used to try to influence regulators.

"Just because certain people in the United States would like to see Canada be one giant national park for the northern half of North America, I don't think that's part of what our review process is all about," Harper said in a Jan. 16 interview with CBC television.

'Red Herring'

"This contrived funding 'debate' is a red herring," Merran Smith, director of Tides Canada's Energy Initiative, said in a Jan. 10 statement. Natural Resources Minister Joe Oliver has cited Tides Canada as a group that's channeling U.S. money to pipeline opponents.

Regulators have received 4,507 requests by individuals to testify at public hearings on the project that began this month. Environmental and aboriginal groups say the project will increase the risk of an oil spill off the coast of British Columbia. The regulatory panel reviewing the pipeline last month pushed back its timeline for reaching a decision to the end of 2013.

Harper's drive to sell oil to China comes as the Asian nation steps up foreign investment. Chinese companies have purchased more oil and gas assets in Canada from 2005 to 2011 than acquirers from any other country, according to Bloomberg Government.

Largest Acquisitions

Two of the largest acquisitions of Canadian oil and gas companies last year were driven by Chinese companies. In October, China Petroleum and Chemical Corp., Asia's biggest refiner also known as Sinopec, agreed to buy oil and gas producer Daylight Energy Ltd. of Calgary. In July, Cnooc Ltd., China's largest offshore oil explorer, bought Calgary-based Opti Canada Inc. to expand its oil-sands reserves. Both deals totaled more than $2 billion each.

"China's energy security isn't simply about shipping oil back to China," said Wenran Jiang, political science professor at the University of Alberta and senior fellow at the Asia Pacific Foundation of Canada. "There's also trying to increase overall global supply of oil to help manage price and supply."

The push by Harper for closer ties extends beyond the oilsands. Canada has been working on an agreement with China that would give Canadian companies greater legal protection in disputes with Chinese governments. Trade Minister Ed Fast said in October that the two sides are close to an agreement.

Investments Welcome

Harper may seek to provide assurances that additional investments will be welcome during his trip to China. In a Sept. 21 interview with Bloomberg, Harper said he welcomed investment by China as long as such acquisitions are "economic in nature and don't have other strategic or political objectives."

The challenge for Harper and China may be to assuage any concerns in the U.S. that Canada is getting too cozy with the Asian power. Harper acknowledges the U.S. will remain Canada's dominant trading partner for "many years to come."

"China doesn't want to be perceived as being predatory and taking advantage of a weakening of the relationship between Canada and the U.S.," the University of Alberta's Jiang said. "That would cause alarmists in the U.S. to further perceive China as a threat."