Lucrative Energy Deals Await, But Will Chinese Bureaucracy Hinder Such Deals?

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Long before a well-publicized deal to send Canadian oil to the United States was knocked to the sidelines by the American government, based almost solely on political gamesmanship, it became abundantly clear that Prime Minister Stephen Harper and the federal government would continue to aggressively pursue other global markets with which to strike mutually beneficial deals for the oil and gas sector. During an interview with Natural Resources Minister Joe Oliver it was confirmed to CBJ that he and the prime minister were in China when news broke that the Obama administration was putting a delay on the Keystone XL pipeline development.

As of now, almost 99 per cent of Canadian oil is exported to the United States – our number one economic trading partner in virtually all major industries.

While there’s little doubt this country wants to continue moving forward with that effervescent relationship, it has become abundantly clear that diversification must be a primary objective, now more so than ever.

There’s no scarcity of other nations who’ve shown a keen desire in doing business with Canada, the most predominant being China. The world’s most populated nation has a dire thirst for additional natural resources to quench is always-growing energy demands. The trip to the Orient by Prime Minister Harper and Minister Oliver included four days of intense talks with Chinese ministry officials, with both sides pronouncing the outcome largely successful.

Harper’s economic pitch to the Chinese was quite straightforward and to the point. Simply put, Canada wants to sell its natural resources to countries interested in buying in order to increase economic productivity as well as international diversification. Harper has reiterated that while Canada will sell, it will not sell out.

“Canadians believe, and have always believed, that the kind of mutually beneficial economic relationship we seek is also compatible with a good and frank dialogue on fundamental principles,” Harper declared in a release to the media. “We uphold our responsibility to put the interests of Canadians ahead of foreign money and influence that seek to obstruct development in Canada in favour of energy imported from other, less stable parts of the world.”

Negotiations

The two governments are also moving forward on the expansion of an air transport agreement in an effort to increase the flow of people and goods between Canada and China. Among the initiatives will be increased flight options and lower air fares. There is also an agreement to ship additional uranium to China as part of a legally binding agreement dating back 18 years in which both sides agree that its use will be for peaceful purposes in developing nuclear energy.

The mandate is in line with Canada’s nuclear non-proliferation policies and “will ensure that Canadian supplied uranium is being used in China’s nuclear program strictly for peaceful, civilian purposes,” according to the government.

For decades, the oil and gas sector has been one of the main driving forces behind the strong Canadian economy. The industry accounts for more than $80 billion in revenue on an annual basis and has a presence in nearly every province and territory, which may come as a surprise to many people, since most of the productivity comes from western Canada and the Atlantic provinces.

Harper has said building pipelines to the West Coast is a national economic priority, especially with Asia being such an enormous untapped marketplace with seemingly unlimited potential. The government has pushed hard to see projects such as the proposed Enbridge Northern Gateway oil sands pipeline and a separate one for liquefied natural gas come to fruition.

Enbridge CEO Pat Daniel has pointed out the commitment by the Chinese and Canadian governments for a strategic energy partnership will allow Canada to diversify its oil-and-gas export markets beyond the United States. What remains unclear is the degree with which Canada and China will embark on an agreement. Thoughts of a full-out free-trade pact have been ruled out in the short term by both Harper and Oliver, despite the fact preliminary talks have taken place. It’s the Chinese who are pushing hard for it, but Ottawa is taking a much slower approach, preferring instead to see how the current setup works before deciding to jump in with both feet. Correcting a noticeable trade imbalance would be job-one.

Dr. Charles Burton is a professor at Brock University in St. Catharines, Ontario. He’s a former diplomat who’s worked at the Chinese embassy and is widely acknowledged as an expert in Canada-China relations. He says two main things that came out of the talks were the declaration of intent to complete a bilateral Foreign Investment Promotion and Protection Agreement, and secondly the study of the Canada-China economic partnership working group to explore what areas of the two economies are complementary, which could lead to a type of free trade agreement. Burton is of the opinion Canada is smart to diversify its markets, regardless of the delay in the Keystone XL project.

“We have enough oil and natural gas to supply both the United States to the south and over the Northern Gateway to China and other parts of Asia from the northern coast of B.C. so I don’t see the two being at odds with each other,” he says. If there’s an alternative market in Asia with which Canada can trade, it will result in improved monetary standards in terms of what Canadian producers can charge the Americans, who now get an exceptionally favourable, cut-rate deal.

Benefits to the Chinese

A main attraction for the Chinese is the ability to source oil from a reliable supplier such as Canada, especially in light of the political instability of other partnering nations such as Sudan, Iran or other Middle Eastern countries whose inner turmoil could conceivably lead to disruption of crucial product deliveries.

The development of the ports infrastructure to make the pipeline a reality is something that Chinese state-owned companies would like to be involved in and they have the funds to facilitate the process. Prime Minister Harper has noted that such infrastructure would be able to reach a number of Asian markets as well as China.

Minister of International Trade Ed Fast has increasingly voiced support for establishing the Canada-China Foreign Investment Promotion and Protection Agreement. Burton believes such an agreement would be a great benefit to Canada, but gauging China’s benefit is not as straightforward. There’s also a definite concern about the very real possibility of dealing with some underhanded, unscrupulous business tactics, as has been plainly evident in the past with numerous Chinese companies.

“Canadians who invest in China have had difficulty in retaining their intellectual property rights and their proprietary manufacturing processes,” Burton notes.

“There are problems in getting recourse to legal resolutions in China when they feel the contracts with their Chinese partners have not been upheld, particularly in cases where Canada goes in using Canadian technology to gain an advantage in the manufacturing process. What often happens is the people the Canadian company has been partnering with from the start will then open an identical manufacturing facility, using what is evidently the Canadian proprietary process – without paying royalties. Often the local government will then impose different sorts of non-tariff barriers and fees and arbitrary taxes, making it unfeasible for the Canadian firm to continue operating in China – so they cut their losses and leave.”

This type of scenario has repeated itself numerous times over the years. Such tactics are of immense concern to organizations like the Canada-China Business Council and their members.

“Because the system of law in China is not independent and is subject to arbitrary manipulation by local authorities, it would be highly desirable for Canadian firms in China to have some recourse to a mediation process in case of disputes,” Burton says. “This would typically be locating a mediator offshore, say in Scandinavia, which would give Canadian firms confidence they’d get fair adjudication in disputes with their Chinese partners.”

The key result of going this route would be to even the playing field for each side. Chinese companies operating here in Canada already enjoy the benefits of our comprehensive rule of law and transparent business regulations and impartial judiciary.

“My analysis would be there’s not a lot of incentive for on the Chinese to negotiate an effective agreement with Canada because Chinese investment is already protected,” Burton states. “It’s something we want and the Chinese would like to get something in return.”

As of now, negotiating has been bumpy and disjointed to say the least. On a positive note, when Prime Minister Harper was in China with Natural Resources Minister Joe Oliver the two sides signed a declaration of intent. However, intent and action are two different things.

“Canada is quite confident that on the Canadian side we can work out such an agreement in a timely fashion, because we have a majority government in Parliament,” Burton states. “The Chinese statements that I’ve seen about it seem to be less confident about an early resolution of the Foreign Investment Promotion and Protection Agreement.”

The attempts to negotiate FIPA have been ongoing since 1994, with very little progress to report.

Canada signed a similar declaration of intent with India five years ago and up until now, because the Indian Parliament had some reservations about certain aspects of it and wanted further negotiation, we still don’t have one to this day.

“It was unexpected to see this declaration of intent as No. 1 in the list of accomplishments of the Harper visit, but I’ll believe it when I see it,” Burton declares.
Free Trade?

The short-term objective is to open up trade talks and begin working out deals. But how inclusive are they likely to become? The Prime Minister and the Minister of International Trade have both made suggestions that we’re getting a bit ahead of ourselves in thinking in broad economic terms such as that.

“The problem is that within China there are so many structural barriers to Canadian access to the Chinese market and there’s a great deal of local protectionism,” Burton states. “Because of the lack of comprehensive rule of law, it’s actually difficult for the Chinese central government to get local compliance with an international treaty such as a free trade agreement.”

As it stands, China has a 4 to 1 trade surplus advantage with Canada, but that could be greatly mitigated if we were to begin exporting large quantities of oil and liquefied natural gas.

“I think the number of conditions and carve-outs the Chinese would ask for would significantly inhibit the nature of a trade agreement and the mechanisms to adjudicate disputes could be quite problematic,” he continued.

Another major difference is that Chinese companies are arms of the Chinese state, which means the Communist government and the various ministries are directly involved in the decision-making process as opposed to having corporate boards of directors as we have in the western world. Chinese companies are subject to ruling party control.

There are concerns about Chinese state investment in Canada, and some are certainly legitimate ones according to Burton.

“Particularly there are some critical sectors such as telecommunications and defence industries where there’s concern the investment might serve other interests of the Chinese state,” he says. “With energy, there’s concern a state has a significant stake in infrastructure. There seems to be a lot of things we’d need to get clear before anything resembling free trade were likely to happen.”

While finalizing a deal to send our oil and gas to China is priority one, the entire Asian continent is a great untapped market for Canada’s natural resources.

Japan and Canada opened free trade talks near the end of last month. Japan is currently Canada’s fifth-largest trading partner, but a wider, more encompassing agreement is now being considered. In 2011, we exported nearly $11 billion in products to Japan, while we bought about $13 billion of their products. Japan has the world’s third-largest economy behind only the United States and China in terms of nominal gross domestic product. Canada ranks No. 10. 

Government reports have indicated that a full free-trade agreement between Canada and Japan could result in a potential increase of up to $3.8 billion a year in Canadian GDP, with exports increasing by two-thirds of the current level.

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