China and Canada’s Energy Future

China expert Gordon Houlden explains why China represents a critical market opportunity for growing Canadian exports of oil and natural gas.

Professor Gordon Houlden is director of the University of Alberta’s China Institute and a former Canadian diplomat. He has spent more than 30 years working for the Canadian government on trade, policy and other issues related to China. Under Professor Houlden’s leadership, the China institute has focused on contemporary China studies, with an emphasis on Canada’s trade, investment and energy linkages with China. Context recently spoke to him about China’s growing demand for oil and natural gas—and why getting a foothold in this market is key to Canada’s export ambitions.

Q: What kind of interest does China have in importing more oil and natural gas?

A: They have necessity. While China has been an oil-producing country for a very long time, it’s just not self-sufficient. They’re the number one oil importer of crude oil on earth. They have a modern industrial plant complex and a growing transportation network that depend heavily on oil. They’re also net importers of natural gas, which they use for heating and industrial activities. Any way you look at it, they’re a huge and growing consumer of energy.

Q: What factors are driving demand for more oil and natural gas in China?

A: Much of their crude oil is used for transportation. China has lot of automobiles. They’re number one or two in global automobile production in any given year, and that’s almost entirely for domestic use.

When it comes to natural gas, a major attraction is not just industrial use but also in reducing pollution. The country’s 13th five-year plan, which runs from 2016 to 2020, specifies the replacement of coal in non-power sectors through natural gas or electricity. There are still many parts of China where they rely on large centralized heating stations that use coal to produce steam and heat for multiple buildings. There’s a big need to get coal out of direct heating. And using natural gas offers a huge environmental improvement, particularly in cities like Beijing where there’s an effort to clear the skies.

Gordon Houlden, director of the University of Alberta’s China Institute, believes Canada has a great opportunity to export oil and natural gas to China, if we can overcome infrastructure challenges. Photo by Jason Franson

Q: How is China’s middle class contributing to energy demand?

A: The middle class is a big growth factor. This part of the population is growing rapidly, and it’s now in the hundreds of millions. The Chinese middle class drive and love their cars. They travel more inside the country and internationally. Their houses are becoming bigger and they’re consuming more goods. All of this means more demand for energy, transportation fuels, or crude and natural gas feedstocks.

But an even bigger driver to growing energy demand in the country has been ramped-up industrial production. China is the workshop for the world, producing a whole range of consumer items. To do that, they have to import and consume a lot of oil and natural gas.

Q: What kind of opportunity does Canada potentially have in China’s energy market?

A: China is the world’s number one energy purchaser. They’re heavily dependent on the flow of oil from places like Saudi Arabia and the Middle East. They also buy oil from Angola and Nigeria in Africa. With these areas, there can be chokepoints in the event of conflicts and security of supply issues. I’m confident they would like to have other energy source countries.

By comparison, Canada is seen as rock solid—a very dependable, stable state. So that’s an attraction for them.

As a country, Canada could never be a major supplier to China. We simply don’t have the production volumes to meet China’s enormous demand. Still, we have a situation where China wants to diversify its oil and gas supply, and in Canada we want to diversify our oil and gas market as a nation. So our two countries could be a good match if we can overcome problems of infrastructure in Canada.

Q: What advantages does Canada have as a potential energy supplier to China?

A: Distance is one. Shipping oil and gas from the West Coast involves shorter sailing distances to China than some of our competitors’ ports. Another attraction is our stable environment in economic, legal and political terms. Plus, we use innovative extraction technologies for developing the resource.

Q: Is another advantage our reputation as a country?

A: Absolutely. It’s hard to assess this with precision, but certainly the Canadian brand is perceived to be of high value. As a country, we’re seen by the Chinese as friendly, safe—a good partner. There are good government relations between Ottawa and Beijing. That all counts for something.

Q: What do Chinese see as disadvantages to have Canada as a potential energy supplier?

A: That our business environment is not always easy for them.

When I tell Canadian business people that the business environment in China is complicated, with its different language and laws, they nod and say, “of course.” But if I tell them that the Chinese find the Canadian business environment challenging with lots of complex regulations and environmental rules, they’re often surprised.

Canadians don’t often think about this—that others may find our country’s business climate difficult to deal with. But the Chinese certainly perceive this. For example, getting the licensing and green light to proceed with export infrastructure projects in this country has been complex far beyond what the Chinese initially hoped or expected. And that’s been a significant downside.

Q: What kinds of challenges does Canada have to address?

A: The biggest obstacle: infrastructure, infrastructure, infrastructure. The Chinese would like to ship oil from Canada to China, and there’s no easy way to do that. Completing the Kinder Morgan Trans Mountain pipeline expansion will help. Also, some oil will travel down to the U.S. Gulf Coast and from there to other markets. But I still don’t see a quick and easy way to get large volumes of Canadian crude into Chinese markets. There is still an infrastructure piece missing—we will need more market access options.

Q: What are some of the competitive realities that Canada faces?

A: The competition will be fierce from established exporters. Consider natural gas exports, for example. Some of our competitors, like Australia and Indonesia, already have gas resources and LNG facilities close to tidewater. They’re actively supplying LNG to China and are in a position to ramp up supply quite quickly. Meanwhile, in Canada we haven’t got a single LNG export terminal yet. If you’re an investor and you want to know how soon we will be able to get product to China, the answers are not clear.

Q: What kind of urgency does Canada face in positioning itself to take advantage of energy market opportunities in China?

A: I’m worried that there’s not a sufficient sense of urgency in Canada. I understand that in Canada there needs to be the proper means of decision-making in terms of issuing permits and licenses for export infrastructure projects. But I’m not convinced we have to take as long as we are. The regulatory process can be thorough but more timely. It shouldn’t take multiple years to do environmental assessments and approvals for projects. We are sometimes our own worst enemy in Canada.

Q: Do you think Chinese investors will be closely watching what happens to Trans Mountain?

A: Absolutely. Chinese oil companies will be watching this project along with what happens to Keystone XL in the U.S. If we’re going to overcome our growing reputation as a country where it’s difficult to build project infrastructure in a timely manner, we will need to deliver on Trans Mountain at a minimum. ©

In this article, Context speaks with:
  • Gordon Houlden Director of China Institute, University of Alberta