Pandas and Pipelines: China Yields Big Deals and Bigger Promises


"Canada's Prime Minister Stephen Harper returns from China with two giant pandas in tow and $3B worth of signed agreements. The Northern Gateway pipeline will most likely tie China to Alberta's oil sands."

Canada's Prime Minister Stephen Harper returns from China, with two giant pandas in tow, and $3B worth of signed agreements to move forward on. But it's what Harper left behind that's going to be the biggest question, as the PM made some bold statements regarding the fate of the Northern Gateway pipeline that will most likely tie-in China to Alberta's oil sands over the biggest pipeline in the world: the ocean.

The problem for Harper is, there are still plenty of people standing in his way with proper legal proceedings currently underway. Not to mention, there are two provincial governments that need to co-operate, and many construction hurdles that need to be acknowledged along the way.

This isn't to say that the Enbridge (TSX:ENB) project won't go through without a hitch, but before the PM goes around writing checks for pandas that he may not be able to cash, you'd at least think he would've waited to see how the court proceedings in Kitimat and across BC and Alberta play out first. No one can fault Harper and his entourage for their urgency surrounding this trip, especially following the fallout from the Keystone XL pipeline "refusal" by the US.

It would be foolish to believe that the Chinese didn't see through the timing of the trip, as they are quite entwined with the outcome of the Northern Gateway. China has questioned the delays, and rightfully or wrongfully scrutinized Harper as he continues to shill for the transshipment of Alberta's oil abroad.

What Harper did, however, was essentially promise that he can deliver. How he plans to do this within the rule of law should be in question. While some of the arguments in opposition may not be the strongest, there are still a lot of headwinds to sail through for Enbridge's ship.

And if the pipeline debate within Canada is already a foregone conclusion, why bother wasting everyone's time in court, in the media and on the sidelines when they could be breaking ground and getting that oil onto the seas? Because, Harper's leverage is weak. He should know this. The Chinese sure do.

Ideally, in an alternate universe, the Republicans to the South wouldn't have pressured the Obama administration into making a snap judgment. The Keystone would've been approved, and a deal with China wouldn't have seemed so imperative.

According to the U.S. Energy Administration, Canada is currently the leading exporter of oil to the United States, piping in 2.6M barrels per day, and accounting for nearly 29% of all US imports. Keystone clearly would've increased that number, but alas this is not that universe, and Harper still has work to do.

With a price tag of $5.5B, and 730 miles to traverse, the Keystone's cousin, the Northern Gateway, is proceeding at a snail's pace. And this isn't keeping the Chinese happy, as they've already sunk significant dollars into the oil sands so far, and want their return on investment sooner than later. And despite the Harper cabinet's attempts to quell opposition by calling their opponents "radicals," there are over 4,300 individuals scheduled to speak throughout the hearings, all of which will take time to move through.

At times it may appear that Harper wishes he could have the type of authority that China has over its people to push through projects such as this. And while the PM is making headlines in Canada with questionable crime bills and his strong-armed methods of dealing with the media, he does not actually have a magic wand he can wave to make this Enbridge pipeline go underground any quicker. This irks the Chinese, as well as Enbridge.

Pat Daniel, CEO of Enbridge, accompanied Harper on the Beijing trip. "They're frustrated, as we are, in the length of time it takes," said Daniel upon his return. "They're very anxious to diversify their supply, they're very dependent on the Middle East for crude. (Canada) seems like the perfect match that should last a long time, but if you don't move it along, people do lose interest. We don't have forever. The fundamentals in the business can change and you must take advantage of opportunities if and when they present themselves."

What does Harper have up his sleeve to move this forward? He's said he is working to quickly draft new legislation to ensure a more rapid review process free from any hijacking from interest groups.

The fact of the matter is, Harper's trip was indeed positive for both sides. It's apparent that China really wants Canada's oil, and wants to see Harper succeed. Chinese investment has plunked down $10B already into Canada's energy sector, and they are doing so in a very polite way, seeking only minority ownership stakes in the projects they engage in. This in turn raises fewer red flag among Canadians, and puts these investments under smaller amounts of scrutiny.

Chinese investment is incredibly important going forward, as there are still signs that Canada's neighbors to the south are in decline. As Iran continues to push forward with its ploy to accept gold for oil, instead of the US greenback, the era of the petro-backed US dollar may be coming to an end. China, like the Americans, see Canada as a safer source of energy than the conflict-infested states of Iraq, Iran and Sudan that are currently sending oil into China.

The fact of the matter is, Harper and Enbridge are working as fast as they can to make this connection work. Just like many of the customary practices Harper's entourage adhered to while on their trip, China has to return the favor and acknowledge that Canada has its own customary way of doing things. Sure the Chinese could build the pipeline faster, if this project were in China, but it isn't, and really, the Chinese should know that. Instead of putting undue pressure on the Canadian government to ram this through, Harper has PR battles to deal with at home, and unleashing a totalitarian dark side won't help the cause.

So, the Prime Minister has returned with more than 20 commercial agreements, for deals worth around $3B. This is a success. Bringing back a couple of pandas, also a sign of goodwill. But, giving a false impression that Harper and his team can make the Northern Gateway project happen faster than the two-year window allotted for hearings could possibly be a big mistake, and could ultimately damage the relationship when China realizes Canada is a democracy with rules that need to be adhered to.

Disclaimer: No information in this article should be construed as individualized investment advice. A licensed financial advisor should be consulted prior to making any investment decision. VantageWire makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the VantageWire only and are subject to change without notice. VantageWire assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this article and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. The author of this article does not currently own shares of any of the companies mentioned in this article. Furthermore, VantageWire assumes no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this article.

G. Joel Chury
Editor in Chief

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