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Canada’s Oil: Implications for Iran Sanctions, China, and the United States

September 28, 2012

By Terry Glavin

A bid by a massive Chinese government-owned energy conglomerate for one of Canada’s largest energy extraction companies threatens to radically undermine U.S.-led sanctions on Iran.

Lost in the dust-up over the Obama administration’s decision to delay approval of a portion of the Keystone XL pipeline from the Alberta oil patch to the Texas Gulf coast, in July the China National Offshore Oil Corporation (CNOOC) tendered a jaw-dropping $15.1 billion for the $6.5 billion Calgary-based Nexen Inc., a major Canadian energy extraction firm with holdings in Alberta, the Gulf of Mexico, the North Sea and elsewhere. Few in Washington are paying attention to the national security implications.

Canada’s official review of the CNOOC bid is expected to conclude next month. Because of Nexen’s minor American holdings, the White House also has to approve the deal. No Chinese government entity has attempted anything as audacious as this since CNOOC’s failed 2005 attempt to devour Unocal for $18.5 billion.

The Oil and Gas Journal puts Canada’s crude oil reserves at 173 billion barrels, ranking behind only Saudi Arabia and Venezuela. Almost all that oil comes in the form of bitumen, in Alberta’s oil sands. Canada’s National Energy Board reckons bitumen production will triple over the next 25 years and crude oil available for export will more than triple. Canada’s Conservative government intends to exceed even those expectations, and Ottawa knows full well it will need Beijing’s money to make that happen.

The CNOOC jumble should be understood in light of a dangerous confabulation making the rounds in Canada and the United States, which goes something like so: The American-led campaign of sanctions on the oil-rich Khomeinist regime in Iran is posing an effective encumbrance upon the ayatollahs’ efforts to acquire nuclear-weapons capability; thus, any Israeli consideration of unilateral military action against Tehran is just crazy talk.

The most obvious fly in that ointment is that Tehran hasn’t stopped trying, and sanctions aren’t biting. The Obama administration has issued Iran-sanctions oil waivers to Japan, India, Taiwan, Turkey, Malaysia, South Africa, ten European countries, Sri Lanka, South Korea, and to China. If it seems a mystery that American sanctions aren’t making any difference, it shouldn’t. The main reason is Beijing. China is Iran’s main trading partner. Beijing is Tehran’s biggest oil buyer. Oil is the Tehran regime’s main source of revenue.

If it seems a mystery that American sanctions aren’t making any difference, it shouldn’t. The main reason is Beijing. China is Iran’s main trading partner. Beijing is Tehran’s biggest oil buyer. Oil is the Tehran regime’s main source of revenue.

CNOOC’s Nexen bid has even ended up contributing to another urban legend making the rounds  – the one that would have us believe that Obama is recklessly disregarding his oil-rich Canadian suitors. But the hard truth of it is that Canada decided to grant Beijing the privilege of developing Alberta’s oil sands years before Obama’s non-decision on Keystone. Ottawa has given fervent and concurrent support for the proposed $6 billion Enbridge Inc. pipeline from Alberta to Canada’s west coast. Prime Minister Harper has called the Enbridge plan Canada’s gateway to energy prosperity in Asia, even though Enbridge is all about multi-billion-dollar intimacies with the same Chinese state-owned enterprises that are Tehran’s gateway to a nuclear bomb.

Inconveniently for everyone concerned, what all this is likely to mean is that the splendid Canadian oil that Americans are expected to buy will have to be purchased from Beijing-owned multinationals that also happen to be deeply embedded in Tehran’s secrecy-shrouded energy sector, which could fatally weaken North American and European sanctions.

Before its way-above-market bid for Nexen Inc., CNOOC Ltd. was already entrenched in Canada’s oil patch while its parent company, the CNOOC Group, was pursuing arrangements with Tehran to develop Iran’s North Pars gas fields. Petro-China is doing a roaring business in Alberta while a sister subsidiary is attending to multi-billion-dollar arrangements with the National Iranian Gas Export Company. Sinopec (the China Petroleum and Chemical Corp.), Iran’s biggest oil customer, took possession of a $4.65 billion veto-holding position on the board of Canadian oil sands giant Syncrude before the Keystone pipeline was much more than a glimmer in Prime Minister Harper’s eye.

There are only two clear Canadian voices of opposition on the subject. One is Green Party leader Elizabeth May, who objects to China’s undemocratic and Tehran-bankrolling government exacerbating Canada’s already-overheated oil sands expansion (which will only further accelerate greenhouse gas emissions). The other is the former Canadian justice minister Irwin Cotler, a prominent international champion of the proposition that the way to avoid war with Iran is to enforce crippling sanctions against the Khomeinist regime. “To the extent that we’ve now got sanctions-violating companies here in Canada that are doing business in Iran, the implications are serious,” Cotler says. “They are very, very serious.” There are also members of Prime Minister Harper’s own cabinet who aren’t happy with any of this, but they’re not complaining in public.

Canada’s sanctions laws are easily evaded. There is nothing to stop Beijing from setting up one state subsidiary to do business in Calgary and another to do business in Tehran. And what to do when the United States doesn’t take its own ideas seriously? “You can do business with Tehran or with Texas” is the way American sanctions on Iran are supposed to work. But they’re not working that way.

The “unmistakable message” the Canadian government is giving the United States: “You’re yesterday, China is today, and if you want to do any oil business with us then you’ll have to be prepared to do business with the Canadian subsidiaries of Beijing’s overseas acquisitions arms, which also happen to be the most notorious Iran sanctions-busters in the world.”

“The Obama administration’s decision earlier this summer to exempt all 20 of Iran’s major oil customers from biting new sanctions has sent the unmistakable message to Asian nations that—despite the official bluster emanating out of the White House—it is still possible to do business with both Washington and Tehran simultaneously.” That’s how Iran expert Ilan Berman put it, writing in the Wall Street Journal.

And here’s the “unmistakable message” the Canadian government is giving the United States: “You’re yesterday, China is today, and if you want to do any oil business with us then you’ll have to be prepared to do business with the Canadian subsidiaries of Beijing’s overseas acquisitions arms, which also happen to be the most notorious Iran sanctions-busters in the world.”

Here’s how this state of affairs has come to pass. Before the crash of 2008, American demand for Canadian crude had already reached its peak. American markets were already taking more than 90 per cent of Canada’s oil exports – more than two million barrels a day, roughly double what it had been 20 years earlier. Canada is still the United States’ largest foreign oil supplier and the United States still takes the bulk of Canada’s production. But a technological revolution in hydrological fracturing and the sudden accessibility of huge domestic American shale oil deposits have further dampened U.S. appetites for Canadian crude.

For Canada, the “emerging economies” were always where the growth was going to be. India and China eclipse everything else. But Beijing has something more than merely a voracious appetite for energy: money.

Five years before the White House delayed its approval of TransCanada’s Keystone XL pipeline and two years before the crash of 2008, Canada’s Conservative government had already settled on a policy predicated on the obvious: the American economy isn’t big enough to accommodate any serious expansion of Canada’s oil sands. It will have to be Chinese markets, and it will have to be Beijing’s money. In fact, the whole point of the Keystone XL pipeline is to transport Canadian crude to energy terminals on the U.S. Gulf Coast for export to the world market and not to bring the price of gasoline down for American consumers.

The whole point of the Keystone XL pipeline is to transport Canadian crude to energy terminals on the U.S. Gulf Coast for export to the world market and not to bring the price of gasoline down for American consumers.

It was back in 2006 that Prime Minister Stephen Harper declared his intention to turn Canada into an “energy superpower.” It was going to take a lot of money to get all that bitumen out of the ground and it would take high oil prices to make the whole thing work. Conveniently, Beijing happened to be sitting on an immense pile of foreign-exchange reserves. The latest data suggests that Beijing holds about $1.73 trillion in U.S. securities alone.

Canada’s oil companies have been largely foreign-owned for decades, but since 2004, Beijing’s state-owned enterprises have been easily outpacing American companies in their investments in Canada’s oil sands. Petro-China, Sinopec, CNOOC and their sister corporations – all run by the Chinese Communist Party, which is adamantly opposed to U.S. led sanctions – have acquired at least $30 billion in Canadian energy-sector properties.

These takeovers include Canadian companies operating mainly overseas. The China National Petroleum Corporation got its hands around the throat of Petro-Kazakhstan by taking over a Canadian exploration company in 2005 – last December, the repression of a strike by Kazakh oil workers left 14 protestors dead. Sinopec Syria, which is a key means by which Bashar al-Assad finances his ongoing slaughter of Syrian rebels, gained its foothold in Syria’s Oudeh oilfields by purchasing a Canadian company for a mere $2 billion in 2008. And so on.

Beijing’s buying spree in Canada’s oil fields is a function of the “going out (zouchuqu) strategy” adopted by the Chinese Communist Party in 2000. CNOOC’s $15.1 billion bid for Nexen Inc. would be Beijing’s biggest takeover attempt to date. U.S. Democratic House leader Nancy Pelosi’s cautious expressions of concern about the deal contain far more gravitas than anything Prime Minister Harper’s ostensibly pro-American government has had to say on the subject.

Canadians and Americans are perfectly entitled to circulate amusing urban legends amongst themselves if that’s what it takes to make politics interesting. But if it’s a war with Iran we’d rather avoid and a nuclear-armed Khomeinist tyranny we’d prefer not to have to confront, the CNOOC-Nexen bid might present an opportunity to stop telling ourselves fairy tales and start getting serious for once about sanctions, and about Beijing.

Terry Glavin is a columnist with the Ottawa Citizen. His most recent book is Come From the Shadows: The Long and Lonely Struggle for Peace in Afghanistan (Douglas & McIntyre, 2011).

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