A new Monroe Doctrine?

Too hot for CIC to handle

When asked what he considered to be the most powerful force in the universe, Albert Einstein is said to have replied “compound interest”.

Asked the same question, China’s leaders might hope the answer was their own economy. Targeted 8% annual growth means that national GDP could double in just nine years.

But economic growth needs energy to fuel it. Oil is one ingredient but another fossil fuel is gaining attention: natural gas.

As Chinese cities swell with migrants from the countryside, millions more households are using gas for heating and cooking. The government wants gas to meet 10% of the country’s energy needs by 2020 (from less than 4% today). Previously much of the supply has come from China’s western provinces. But with its domestic resources no longer adequate in meeting longer term demand, Chinese energy companies are looking abroad.

Securing a stable and diversified supply of liquefied natural gas is no easy task – and it takes all the cunning of Sun Tzu to get it on the cheap. One recent failure to win a key Canadian pipeline deal shows just how easy it is to get it wrong.

You’re not likely to have heard much about China Investment Corporation’s (CIC) ill-fated bid to buy the ‘Kitimat LNG’ gas pipeline last month. But the setback was a serious blow to its ambitions in North America. Once completed, the pipeline will be the sole channel through which to deliver natural gas from British Columbia to a distribution point on the Pacific.

The pipeline’s new owners, Houston-based EOG Resources (formerly Enron Oil & Gas) and Apache Corporation, are still planning to pipe gas onto Chinese tankers. But they’re likely to take full advantage of controlling a key bottleneck in the supply chain, making that gas much more expensive.

It wasn’t supposed to turn out this way. CIC seemed like the more obvious buyer, and the pipeline’s previous Canadian owner, Galveston LNG, had approached it first. Natural gas trades cheaper in North America than it does in Asia. The Chinese sovereign wealth fund was keen to secure access to those supplies.

So why did China Inc lose out? It wasn’t just a simple business decision – it was a matter of national strategy. So CIC had to coordinate its moves with various government departments and other state-owned companies. In the end, it just took too long.

The main sticking point was that it made most sense for CIC to buy in if a Chinese firm already owned some Canadian gas fields. But that led to a chicken-and-egg situation. “CIC was waiting for a Chinese firm to buy gas fields; the company planning to buy the gas fields was waiting for CIC to buy the pipeline; and the Canadians were waiting for both,” explained John Zou, a consultant involved in the deal.

Anticipating a fall in LNG prices, Chinese energy companies were also worried about government censure if they overpaid. “If the price is too high, the National Development and Reform Commission (NDRC) won’t grant its consent,” one Chinese energy executive told the Economic Observer newspaper.

Eventually Galveston ran out of patience. It sold 51% of Kitimat to Apache in January, but kept on negotiating with CIC. But agreement with the Chinese fund was becoming more unlikely. Losing majority control of the pipeline’s operations took away much of its strategic value. “The project must be jointly operated with a Chinese partner,” insisted CIC official Zhang Qiong.

CIC’s reluctance also stemmed from concerns that it might find itself at a disadvantage if the US government tried to exert influence on Canadian policy. “If Kitimat is under the control of Americans, the Chinese can hardly benefit from participation,” predicted Sino-Canadian trade consultant Bill Wang. “There could be restrictions on exports and the US may fear their neighbour getting too close to China.”

Discussions once again broke down and the remaining shares were sold to EOG in May.

Wang’s comments points to a fear in Beijing that the US still adheres to a Monroe Doctrine – updated to target China rather than the British Empire and its earlier ambitions in the Americas.

Beijing will be hoping that no such continental protectionism flourishes in future, especially in securing access to the energy supply needed to power economic growth in the years ahead. But if GDP continues to grow as rapidly as hoped, competition for resources can only increase.

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