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China Taps Into Canadian Reserves

from the May 24, 2005 eNews issue

For years China has been primarily self-sufficient in providing for its energy needs, but China's energy independence is over. After years of drilling, China's main oilfields are badly depleted and costs per barrel have crept up steadily. At the same time China's economy is shifting into overdrive. Consumption, business investment, and government spending are running at full throttle. China, an oil exporter only a decade ago, has acquired a voracious appetite for foreign oil. China has eclipsed Japan as the world's second-largest oil consumer and by the year 2030, the International Energy Agency predicts China will account for one-fifth of the world's total annual energy demand. China's hunger for oil and other forms of energy cause great obstacles for Beijing and the global economy. Two-thirds of China's provinces have already suffered severe power outages. Experts say that China's demand for oil is the primary reason that prices haven't dropped.

In the past the Chinese government has resisted importing foreign oil, but the depletion of their reserves and growing demand has forced them to look outside their borders to meet energy needs. China has already imported substantial amounts of oil from Russia and expanded its dealings with the oil-rich nations of the Middle East. Now it appears as though China is attempting to gain a foothold in the North American oil market. China is buying into Canadas heavy oil reserves - a move which has received mixed reactions from the United States.

What is Heavy Oil?

Approximately 250 miles north of Edmonton, in the Province of Alberta, is the biggest petroleum deposit outside the Arabian peninsula - as many as 300 billion recoverable barrels and another trillion-plus barrels that could one day be within reach using new retrieval methods. Many believe these deposits could eventually end America's dependence onMiddle Easternoil. According to oil industry experts, if we were to extract 30 percent of Canada's oil deposits it would be enough to meet 100 percent of the United States oil needs (approximately 20 million barrels per day), for the next 100 years.

However the oil found in these deposits is not normal crude oil. It is a very viscous, tar-like substance often called heavy oil. Heavy oil is a type of crude oil that has a low hydrogen to carbon ratio, does not flow easily, and contains more impurities, sulfur, nitrogen, and heavy metals than regular crude oil. Which means it is more difficult to retrieve and requires a specialized refining process.

The type of hydrocarbons that make up crude oil determine what products can be produced from it. While heavy oil does contain some light hydrocarbons that can be made into gasoline and jet fuel, it contains primarily heavier hydrocarbons. If many of the impurities in heavy oil are removed, its' properties can be made to resemble conventional crude oil, which is then referred to as "synthetic crude." However this process is both expensive and complex. The majority of Canadian deposits are made up of both heavy oil and oil sands. Oil sands are even more difficult to extract, 2 tons of sand yields just one barrel of oil. Much of the recoverable oil is classified as heavy oil, but the bulk of Canada's resources are made up of oil sands.

Heavy oil isn't a new discovery. It has been around for centuries, but the technology necessary to extract and refine it has only recently become available. Improvements in mining and extraction techniques over the last several years have cut heavy oil production costs in half. Until the mid-1990's the cost of producing a barrel of heavy oil cost upwards of $15, at a time when the market price of oil was about $20, and OPEC countries could produce a barrel of about $5 or less. However in the last ten years oil companies have been able to the cut the cost of extracting heavy oil to about $9 per barrel (while the cost of extracting the oil sands is approximately $12 per barrel). Heavy oil and oil sands may cost more to extract than conventional oil, but with current prices at nearly $50 per barrel it is still profitable. In fact, Alberta now produces more oil from oil sands than from conventional reserves.

Good News or Bad News for the US?

The United States gets most of its oil (60 percent) from four nations: Saudi Arabia, Mexico, Canada, and Venezuela. Because of growing political instability in South America and the Middle East, the United States has become increasingly dependant on Canada as a secure source of oil. Canada produces 2.39 million barrels of crude a day, almost two-thirds of which is exported to the United States.

In January, during Canadian Prime Minister Paul Martin's first official visit to China, the two countries stated their intent to increase cooperation concerning energy related matters. Since then, China has quietly begun to tap into the Canadian oil market. China's growing interest in Canada's oil reserves puts the United States in the difficult position of balancing its commitment to an open market with its desire for secure supplies of energy. Some experts believe it could have beneficial results – such as helping to stabilize the global market or speeding up the development of Alberta's oil sands. Others dislike the idea of competing with China for Canadian oil supplies. However both sides seem to agree that the impact of China's ever-expanding search for oil goes well beyond the realm of simple economics.

For more information on this and other matters concerning the Rise of the Far East check out the related links below.


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