The world has come to realize just how powerful and influential the Chinese economy is likely to be in global terms. But only recently has it become apparent what the implications might be for Canada. China has billions of dollars to invest. How is it likely to affect the Canadian energy sector?
The extraordinary growth of China’s role on the world stage is one of the most remarkable global developments of the past decade. But its impact on the energy sector and on Canada in particular could be particularly striking. In the past few months major international forays by Chinese companies have made it more apparent just how formidable they will be in the energy sector.
In December 2010 and January 2011, companies owned by the government of China purchased the entire transmission and distribution grid of Brazil – itself the largest economy in South America – established a massive global investment operation with a base in Toronto, and opened the first oil pipeline from Russia to China. This comes on the heels of major Chinese investments in Vancouver-based Teck Resources and a 45-per-cent stake in an Alberta oil sands project owned by Penn West Energy Trust. The scale of the Chinese enterprises is breathtaking, even before what could be a major buying spree in the near future. The China Investment Corp. (CIC) is a $300 billion fund, with a mandate to manage a good portion of China’s $2.85-trillion foreign exchange reserves. China’s State Grid Corp., which bought the Brazilian utilities, is the largest power transmission and distribution company in the world. Its 2008 revenues are reported to be $164 billion.
Whether it is the sheer size of China’s population, an overlooked reserve of business acumen, the effect of unifying a large country’s commercial enterprises under one government roof, or some combination of factors, there is little doubt that the Chinese energy sector will be a force to be reckoned with worldwide for years to come.
Bay Street has not missed the message that the world’s largest sovereign investment firm chose Canada as the location for its first permanent foreign location, or that energy is one of its key concerns. A range of leading investment advisors are adjusting their focus. China is now the world’s largest consumer of energy. Its consumption continues to grow quickly, and the potential for further expansion is greater still. It is investing in just about every form of power generation, including photovoltaic solar, wind farms, and nuclear reactors, in both conventional and innovative modular forms. No doubt its interest in Canada has a lot to do with Canada’s relative surplus of natural resources, and its ability to help Chinese entrepreneurs set up world class manufacturing operations.
In the renewable energy business China has been busy as a manufacturer, growing by leaps and bounds with the help of European companies who used to be world leaders. In what looks like a coordinated industrial strategy, China has quickly become the top manufacturer of wind turbines globally, learning from its competitors on its home turf, and then slicing into their market share on the world stage.
Federal Finance Minister Jim Flaherty is enthusiastic about the CIC move, saying that “I’ve visited China three times as federal Finance Minister and in my last visit in 2010, I discussed the mutual benefits such an initiative would yield to both our countries. I am pleased that the China Investment Corp. has chosen Toronto to locate its North American headquarters.”
As an example, in recent years in South America alone, the following energy acquisitions have been completed:
• China Petrochemical Corp. bought Occidental Petroleum Corp.’s unit in Argentina for $2.45 billion.
• The national oil company CNOOC Ltd.’s joint venture in Argentina paid $7.06 billion for Pan American Energy LLC.
• Repsol S.A. of Spain sold 40% of its Brazilian assets to China Petrochemical Corp. for $7.1 billion.
• China’s Gezhouba Corp. won a contract to build the $600 million Sopladora hydropower plant in Ecuador, while China Development Bank negotiated a $1 billion loan.
• The Sinohydro Corp. inked a deal to build the 1.5-gigawatt Coca Codo Sinclair plant in Ecuador with the help of a $1.7 billion credit loan from China’s Exim Bank.
As Chinese investment gears up in the west, western companies are increasingly vying for opportunities to sell into the burgeoning Chinese markets. Canadian pension funds are likely to get into the act. Mark Wiseman, speaking for the Canada Pension Plan Investment Board, says, “We have a good relationship with (CIC). Our office in Hong Kong interacts with them regularly, and them having an office in Toronto will, we think, in the long run further our ability to partner with them in Asia, and for them to partner with us in North America.”
David Emerson, formerly Canada’s Minister of Industry and International Trade, says the CIC move “... is symbolically and substantively significant because its speaks of CIC taking Canada very seriously and wanting to have a permanent presence here.”
China is now officially the second-largest economy in the world. Between 2007 and 2010 China’s GDP grew by more than 25%, outstripping Japan, the U.S., Europe and even India, by wide margins. The country is reportedly building two power plants a week and setting up two wind turbines an hour. With this kind of pace, combined with the complexities surrounding disclosure of state-led economic activity, it’s nearly impossible to obtain precise figures on investment flows into and out of China and Canada that are both comprehensive and up to date. The following items are intended to be indicative of how dynamic the scene is.
See also:
China about to enter the world market as a major exporter
Round-up of recent news and information on Chinese activity of interest to the energy sector