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

Even before the Keystone XL deal was sidelined by the current US administration, it was abundantly clear that Canada’s federal government, led by Stephen Harper, would continue to aggressively pursue other global markets to make oil and gas deals with.

Still, almost all of Canada’s oil is exported to the US – Canada’s biggest trading partner across a majority of industries. While there is little doubt that the country wishes to maintain and grow this strong bond, there is no scarcity of other nations which are showing a keen desire to do business, particularly China.

In fact, when the Keystone’s highly publicised rejection was announced, Harper and energy minister, Joe Oliver, were in China improving relations with the powerhouse economy. The trip included four days of intense talks with Chinese ministry officials.

Harper’s economic pitch to the Chinese was straightforward – Canada wants to sell its natural resources to countries interested in buying. But that pitch comes with a caveat, Canada will sell, but 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 stated 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 moving forward on the expansion of an air transport arrangement, for example offering increased flight options and lower air fares, intended to increase the flow of people and goods between Canada and China. There is also an agreement to ship additional uranium to China as part of a legally binding agreement dating back 18 years with the stipulation that use is limited to peaceful purposes towards developing nuclear energy, in line with Canada’s nuclear non-proliferation policies.

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 C$80 billion in revenue on an annual basis and has some reach into nearly every province and territory though most of productivity comes from western Canada and the Atlantic provinces.

One of the economic priorities of the conservative government is to build pipelines to the west coast for oil and gas, and it has pushed hard to see projects come on line such as the proposed Enbridge Northern Gateway oil sands pipeline and a separate one for liquefied natural gas (LNG).

Enbridge’s chief executive, Pat Daniel has believes the commitment to a strategic energy partnership between China and Canada will help the latter country diversify its oil and gas export markets past the US. What remains unclear is the degree to which the two countries will embark on any agreement or what it might even look like, though a full-scale pact has been ruled out in the short term by both Harper and Oliver.

Though China is pushing for an agreement, the federal government is taking a slower approach, instead analysing how the current relationship functions before deciding to jump in with both feet. Correcting a trade imbalance would be tabled as a priority.

Dr Charles Burton, a professor at Brock University in Ontario and a former diplomat who’s worked at the Chinese embassy says the talks resulted in two significant results: A declaration of intent to complete a bilateral Foreign Investment Promotion and Protection Agreement (FIPPA) and the joint study of the Canada-China economic partnership working group to explore what areas of the two economies are complementary. This could lead to a free trade agreement and Burton believes that Canada is wise to diversify its markets, regardless of the Keystone delay.

“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 BC [British Columbia] so I don’t see the two being at odds with each other,” he says. 

In addition, more customers will make Canadian producers more competitive since US consumers currently get favourable deals.

China’s benefit?

China likes Canada’s stability. Consider some of the political turmoil in its partner nations such as Sudan, Iran or other countries in the Middle East.

Ports infrastructure development to make the pipeline a reality is something that China’s state-owned companies want to be involved in and have the deep pockets to do it. Burton believes such an agreement would be a great benefit to Canada, but gauging China’s benefit is not as straightforward. Concerns have also been raised over Chinese companies’ track records of dubious business practices.

“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.”

It is an all too familiar scenario and not surprisingly such tactics raise red flags for organisations 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 main idea is to establish a level playing field – Chinese companies operating in Canada are protected by rule of law, transparent business regulations and an impartial judiciary.

“My analysis would be there’s not a lot of incentive for 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.”

Up to now, negotiating has been bumpy and disjointed to say the least but a declaration of intent has been signed. But what does that mean in practice?

“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 says.  “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 FIPPA have been ongoing since 1994, with very little progress to report.

A similar declaration of intent was signed with India five years ago and since the country’s parliament has some reservations and want further negotiations, not much has happened since.

“It was unexpected to see this declaration of intent as number one 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 is it still early days to start thinking past that, in broad economic terms?

“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 explains.  “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 four to one trade surplus advantage with Canada, though this imbalance could be greatly mitigated if we were to begin exporting large quantities of oil and LNG.

“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.

Moreover, Chinese companies are arms of state, which means the communist government and various ministries directly involved in the decision-making process. Contrast this to the familiarity of corporate boards of directors.

Some of the concerns about China state investment in Canada are legitimate, notes 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.”