China's bid for North American oil raises U.S. concerns over energy, security

02:20 PM EDT Jul 17

WASHINGTON (CP) - China's bid for an American oil producer has sparked a wave of unease among U.S. politicians worried about national security, energy supply and a red storm of unwelcome investment.

Unocal is a relatively small player in the U.S. energy market. But some American legislators view the $18.5 billion US bid from the state-run China National Offshore Oil Corporation as part of an ominous scheme posing a challenge to U.S. energy sources and global power.

It's a climate of anxiety that is also provoking questions about whether the Communist country's equally keen interest in Canadian oil will one day leave Americans out in the cold.

Duncan Hunter, chairman of the House of Representatives Armed Services Committee, said he's considering legislation to block the Unocal deal if it's approved by shareholders and a federal commission that reviews foreign investments.

"The simple fact is that energy is a strategic commodity," he said at recent hearings on Capitol Hill.

A Chinese-controlled Unocal could deny America access to its oil, said Hunter, and its pipelines run through several countries that are key U.S. allies in the war on terror.

"China's purchase of Unocal would dramatically increase its leverage over these countries and therefore its leverage over U.S. interests in those region," he warned.

"Chinese enterprises do not behave as normal commercial companies on the international market. Instead, they obey the political directions of China's Communist government."

James Woolsey, a former CIA director, said China was among the "worst of the worst" dictatorships. He dismissed suggestions the country will take a softer political line as its economy expands.

"Oil can be used as a tool of war," he said. "This is a sharp elbow, this attempt to take over this company."

In Canada, there's much less concern about China's rise as a global player and its thirst for natural resources, although many took note last year when China Minmetals was considered a likely buyer for Noranda Inc., a Canadian company. The deal fell through.

A recent Decima Research poll suggested most Canadians don't want the country's resource producers to be bought by foreign state-owned companies.

Chinese companies, though, are increasingly making investments in the Alberta oilsands, where production is expected to triple over the next decade.

This spring, pipeline giant Enbridge Inc. signed a preliminary deal with PetroChina for a new $2.5 billion Cdn pipeline to the West Coast, where crude would be shipped to Asia.

There have also been two small investments by Chinese firms in upstart oilsands companies this year. Larger deals are expected.

For Canada, it offers the promise of new export markets for oilsands crude and probably higher prices. But it would mean an adjustment to the historical practice of sending almost all exports south.

"We need to ensure that we aren't just selling to one buyer," said Industry Minister David Emerson, who notes that there won't be any major competition for Canadian oil for at least a decade while production projects unfold.

And Chinese investments so far have been relatively small, he said.

"Canadians understand we need some diversity. I do not see, at this stage, any big cause for anxiety. We haven't had a major strategic asset bought by a state-owned firm."

Greg Stringham, vice-president of markets at the Canadian Association of Petroleum Producers in Calgary, said: "We've got to treat all comers quite equally."

"These are not huge investments. This is no different from what other countries, including the United States, are doing in Canada."

Stringham said Chinese investors were "quite sophisticated" about their objectives. "They said: 'If we get direct access, great. If not, these projects will increase global supply'."

Murray Smith, Alberta's representative in Washington, said multiple markets are a good thing for any supplier, and the United States would still receive the vast majority of Canadian oil so there's no need for Americans to panic.

"I think it's an initial reaction that's born out of change."

That's little consolation to some U.S. analysts who warn about political fallout if Canada diverts resources that would normally flow south.

"The possibility of Chinese acquisition of portions of Canada's energy industry, which could lead to a loss of up to a third of Canada's potential exports to the U.S., should be a source of concern in Washington," noted Gal Luft, executive director of the Institute for the Analysis of Global Security.

In an institute report, Luft said some Canadians feel the United States has taken their oil exports for granted and the Chinese competition could give them leverage over Washington on other issues like the softwood lumber dispute.

"The temptation of an influx of Chinese investment may be difficult to resists. This is a shortsighted view."

Control of major companies by a Communist government could hurt Canada-U.S. relations, said Luft, and tempt Canada to diverge from the U.S. view of human rights abuses, arms sales to the Middle East and China's relations with Taiwan.

Calgary investment analyst Wilf Gobert scoffs at such scenarios.

"It's a huge political football. It has no economic reality," said Gobert, who also dismisses worries about selling assets to a country that may one day become an enemy. "If China goes to war with North America, there's not going to be any oil going to China."

As well, he said, Canada and the United States are members of the International Energy Agency, where oil importing countries have agreed to share shortages.

So far, China's investments in Canada have prompted fairly sanguine comments from U.S. officials, who want to become less dependent on far-off uncertain oil supplies and emphasize conservation.

Still, U.S. Treasury Secretary John Snow recently made a trip to the oilsands in northern Alberta, the first by a high-ranking American official, where he stressed the importance of Canada's oil exports.

"The oil sands are something that we're watching closely and I'm confident will become a larger and larger source of supply to meet U.S. energy needs."

Asked about China's inroads in Canada, Snow said he wasn't overly concerned. "Canada will, I'm sure, make a considered judgment ... through its review process."

A big deal with China that would prompt that kind of review isn't on the table anyway, said Finance Minister Ralph Goodale.

"We encourage foreign investment, we want that to happen on terms that are fair and reasonable," he said. "Further and better engagement of China in international commerce is probably a healthy thing as well."

Paul Frazer, a former Canadian diplomat who now works as a consultant in Washington, said China's interest provides an opportunity for Canada and the United States to work harder on a long-term energy strategy.

"I don't see it as an issue between Canada and the U.S.," he said. "And Americans have to be reminded they have huge energy interests in China. They use security to prevent things from happening."

For Will Dobson, managing editor of Foreign Policy magazine, "all the handwringing" over the Unocal deal is "sort of odd."

"Don't we really want China to follow this path of a market-based system?" he asked. "I would find it dubious that this would be bad for the U.S. or for Canada."

© The Canadian Press, 2005