Michael Richardson: Oil-seeking China steps on US toes

The United States has long regarded Central and South America as part of its backyard; and Canada as an extension of its front porch.

But recent forays by China into the Western Hemisphere are challenging US influence. They are part of Beijing's frenetic global search for large supplies of oil-based energy.

The search has recently taken it to Canada and Venezuela, which together provide about 25 per cent of US oil imports.

While China is not yet buying oil that might otherwise have gone to the US, the Bush Administration is watching closely as state-owned companies from China clinch long-term supply deals in the neighbourhood that could threaten America's energy security.

Reflecting this concern, the US Government Accountability Office - the non-partisan investigative arm of Congress - last month began a study of the risk of potential oil supply interruptions from Venezuela, which is the source of over 10 per cent of US crude oil imports.

Meanwhile, Canada and China on January 20 signed a joint Statement on Energy Co-operation in the 21st Century during a visit to Beijing by Canadian Prime Minister Paul Martin.

It opens the way for Chinese firms to establish partnerships with Canadian energy companies.

A month earlier, Venezuelan President Hugo Chavez said in Beijing that he had signed agreements that would allow Chinese companies to explore for oil, set up refineries and produce natural gas in the energy-rich South American country.

The deal came amid escalating tensions between Caracas and Washington, as the leftist Chavez vowed to reduce Venezuela's dependence on the US oil market by broadening its customer base.

In the six years he has been in power, Chavez has threatened on several occasions to cut off oil supplies to the US in response to what he asserts are persistent attempts by Washington to meddle in Venezuela's internal affairs.

Beijing wants to diversify energy sources for the rapidly growing Chinese economy, as domestic oil output declines and concerns about over-reliance on the volatile Gulf grow.

Venezuela has the Western Hemisphere's largest conventional proven oil reserves. It sells 60 per cent of its crude oil exports to the US and is America's fourth-largest supplier.

Canada is the largest. Huge deposits of oil sands in Alberta province make up the vast bulk of Canada's total proven crude oil reserves of almost 179 billion barrels, the second biggest in the world behind Saudi Arabia.

Oil sands contain black viscous oil. They must be mined and the oil processed before it can be burned as heavy fuel oil or refined into petrol and diesel fuels.

Until now, the sands have been uneconomic. But with oil prices above US$40 ($56.11) per barrel and likely to stay high, and with advances in recovery techniques, the economics of extracting oil from the sands are becoming more attractive. This has caught China's eye.

A joint statement issued on January 20 says Canada and China have decided to work together to promote co-operation in the oil and gas sector, including Canada's oil sands, as well as in the uranium resources sector.

The two sides have set up a joint working group on energy co-operation and will encourage their companies to establish partnerships in these sectors.

One such project is a plan to build a pipeline at a cost of over US$2 billion from Edmonton, the capital of Alberta, to the Pacific coast for shipment of oil to China.
But it will not be plain sailing for Chinese energy companies in either Canada or Venezuela.

Martin's minority Government is coming under pressure to safeguard Canadian resources.

His Industry Minister, David Emerson, has said he is concerned that enterprises owned or controlled by the Chinese Government may not be entirely market motivated.

He is looking at how to strengthen the investment law to protect Canadian interests when foreign entities buy domestic firms.

Chinese companies have agreed to invest US$350 million in 15 oil fields in Venezuela and US$60 million in a gas venture, and to import 120,000 barrels of Venezuelan fuel oil a month.

Refineries in China will have to be refitted since most cannot process the heavy crude oil exported by Venezuela. This may take several years. It is also more expensive to ship oil to China.

Despite these obstacles, some US officials and analysts are worried.

"Every barrel of oil China buys in the Americas means one less barrel available for the US," says Gal Luft, executive director of the Institute for the Analysis of Global Security in Washington, DC.

"This means that the US will have to be more reliant on oil from more remote and less stable regions, primarily West Africa, the Caspian and, above all, the tumultuous Middle East."

* The writer, a former Asia editor of the International Herald Tribune, is a visiting senior research fellow at the Institute of Southeast Asian Studies in Singapore.