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LNG’s geopolitical value

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Ng Weng Hoong: Canada-China relations may be under stress, but over the long term, BC’s resources will prove critical. Part two in a series.

Part two in a series. Read part one

BC’s LNG industry may have more to offer Canada than economic benefits. As Ottawa struggles to deal with a powerful China that seems to hold all the cards in an unbalanced relationship, the FortisBC deal offers hope that Canada might have an ace in its hand.

Canada’s China ties were already faltering when Ottawa, acting on behalf of the US government, arrested Meng Wanzhou, Huawei’s politically connected top executive, in Vancouver last December. China’s response was swift and furious, sending bilateral ties into a steep dive. Within weeks, the government of President Xi Jinping had begun blocking or slowing down the import of Canadian meat and crops, and arrested a number of Canadians including two on alleged espionage activities in China. In 2017, food and agricultural products  accounted for nearly 60% of Canada’s C$24.94 billion total merchandise exports to China.

More damage awaits.

China’s foreign direct investment into Canada plunged 47% to C$4.43 billion in 2018, the lowest in four years. But according to the University of Alberta’s China Institute, it could fall further still. Yet, China’s message that it can do without Canada’s resources or goodwill has limits.

Chinese state planners are worried that the country’s rapidly declining energy self-sufficiency could put a limit not only on Mr. Xi’s global ambitions, but the economy’s long-term growth prospects. Without a secure supply of energy and other natural resources to feed an insatiable appetite, China can forget about becoming a superpower.

Despite making record investments in domestic exploration and production, and extensive efforts to boost renewable resources and energy conservation, China is increasingly reliant on imported fuel. To add to its 2010 “achievement” as the world’s largest energy consumer, it recently became the world’s largest importer of crude oil and gas.

Last year, its crude oil import surged 11% to yet another record of 440 million metric tons. That pushed its import dependence to a new high of nearly 70%. According to BP, China’s oil consumption rose 5.3% to more than 13.5 million barrels per day (b/d) – nearly 14% of the world’s total. A decade ago, China accounted for 9% of global consumption.

Meanwhile, its proved oil reserves have barely grown the last five years. With 18% of the world’s population (and an economy still growing at a rate of 6%), China has only 1.5% of its oil reserves.

Of immediate concern is President Xi’s policy goal to increase the role of cleaner-burning natural gas in China’s energy mix based on his promise to clean up the country’s notoriously polluted environment. But that goal is under threat, as domestic gas production growth has badly lagged behind consumption increases for years. The gap widened further last year, with Chinese gas production growing by 8.3% while demand surged 17.7%. With only 3% of the world’s natural gas reserves, China has no choice but to rely on imports.

For President Xi to deliver on even some of his environmental promises, BP projects the share of natural gas in China’s energy mix will have to rise from 7% in 2017 to 14% by 2040. Over that 23-year period, China’s natural gas demand is seen growing by an annual average of 4.4%. But even at this rate of growth, gas will not displace the country’s filthy coal, which still generated 60% of its electricity last year.

The other grim reality is that China will have to rely ever more on a handful of oil and gas suppliers in politically unstable regions of the Middle East, Africa and Latin America. The regions of Central Asia and the Caucasus, which hold some of the world’s largest hydrocarbon reserves, are rife with superpower and regional-power rivalries mixed with ancient ethnic and religious animosities. Russia has become China’s most important partner, but much of that rests on Xi’s personal relationship with Vladimir Putin, bound by their common opposition to the US. Will Russia remain China’s reliable energy supplier and strategic ally when one or both leaders are no longer in power?

The US could have been China’s saviour had they not become each other’s number one strategic rival. Thanks to the decade-long boom in its shale-based oil and gas industry, the US has suddenly become a major force on the world’s energy markets.

“The United States will soon export more oil and liquids than Saudi Arabia,” predicts Norwegian energy consultant Rystad Energy.

The International Energy Agency agrees, boldly forecasting the US to become an outright net oil exporter in 2021. Three years after that, it sees US net oil export reaching nine million barrels/day to overtake Russia and to eventually challenge Saudi Arabia for the top spot.

If there is to be a contest for superpower supremacy, the US already has an upper hand through its growing energy self-sufficiency while China sinks further into import dependency.

But Beijing doesn’t seem concerned about its energy handicap. On June 1, it raised the tariff on LNG imports from the US to 25%, part of its response to the two countries’ worsening bilateral trade war. It has also drastically reduced oil imports from the US as it believes Saudi Arabia, Iran, Russia and others will make up for the loss.

“Beijing doesn’t seem concerned about its energy handicap.”

These moves will only increase China’s supply vulnerability; to reach East Asia, the bulk of its oil and gas from the Middle East must sail through the world’s worst chokepoints in the Gulf of Hormuz, the Strait of Malacca, and the South China Sea.

Against this backdrop, Canada’s importance to China’s economy is understated and can only grow. While Canada is unlikely to become an energy superpower, it still has nearly 10% of the world’s proved oil and gas reserves, along with vast potential to produce food and other resources that China needs. It wasn’t that long ago that Canada delivered emergency food supplies to millions of starving Chinese suffering under the failed policies of their leaders.

The FortisBC deal is a timely reminder for China to take the long view of its own needs. Canada may not count for much now, but who knows what China’s situation will be as it plunges deeper into a long and harsh economic cold war with the US.

Ng Weng Hoong is a veteran reporter with over 30 years of experience covering the energy industry mostly in Asia. These days, Ng watches the world from his Vancouver apartment. His focus is increasingly on China, its impact on the Chinese diaspora, and the complex relationships that they have with each other and other countries.

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