Canada Finds China Option No Easy Answer to Keystone Snub

Stephen Harper was in need of a new friend with a big appetite for oil. The Americans just weren’t cutting it.

By Edward Greenspon, Andrew Mayeda, Jeremy van Loon and Rebecca Penty

It was February 2012, three months since President Barack Obama had phoned the Canadian prime minister to say the Keystone XL pipeline designed to carry vast volumes of Canadian crude to American markets would be delayed.

Now Harper found himself thousands of miles from Canada on the banks of the Pearl River promoting Plan B: a pipeline from Alberta’s landlocked oil sands to the Pacific Coast where it could be shipped in tankers to a place that would certainly have it -- China. It was a country to which he had never warmed yet that served his current purposes.

Harper stood before a business audience in a luxury hotel banquet hall in Guangzhou, capital of China’s most populous province, putting on his best pro-China face while touting his nation’s virtues. “Canada is not just a great trading nation; we are an emerging energy superpower,” he said surrounded by a phalanx of red Chinese and Canadian flags.

Oil was top of mind. He noted that a single country -- the U.S. -- took 99 percent of Canada’s exports, a situation he described as contrary to Canada’s commercial interests. “You know,” he said, “we want to sell our energy to people who want to buy our energy. It’s that simple.”

Photographer: Jewel SamadAFP via Getty Images

U.S. President Barack Obama and Canadian Prime Minister Stephen Harper take a walk at the Cosmovitral Botanical Gardens in Toluca, Mexico. Close

U.S. President Barack Obama and Canadian Prime Minister Stephen Harper take a walk at... Read More

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Photographer: Jewel SamadAFP via Getty Images

U.S. President Barack Obama and Canadian Prime Minister Stephen Harper take a walk at the Cosmovitral Botanical Gardens in Toluca, Mexico.

Chinese Juggernaut

The Chinese and Canadians in attendance had long waited for Harper to embrace the Chinese economic juggernaut. They held him up for half-an-hour posing for pictures. As he finally took his seat for a group photo with the organizers, he turned to Peter Harder, a former deputy minister of foreign affairs and president of the Canada China Business Council. “Do you think the Americans were listening?” he asked.

That Harper now found himself in the People’s Republic hawking Alberta’s oil spoke to the depth of his frustration with Obama. His view, according to people close to Harper who knew his thinking but aren’t authorized to speak, was that sensible Americans would understand the folly of allowing Canada’s massive oil sands reserves, estimated at 168 billion recoverable barrels, to be sucked up by China, a rising economic and political rival. Yet if the Americans – most particularly a president inclined to indulge his green base at Canada’s expense - didn’t pay heed, then Harper had primed the pump to do business with the Chinese.

Pristine Lands

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The problem is that, his earlier declarations aside, it wasn’t that simple – not then and not now. Important elements of his Conservative party either shared Harper’s misgivings about China’s human-rights record and repression of religion, or were downright hostile to the country.

In British Columbia, with its zest for environmentalism, green and aboriginal groups had already emerged hostile to the idea that its pristine lands ought to be put at risk for a pipeline, known as Northern Gateway, to feed China’s fossil-fuel-propelled growth -- never mind how supertankers might damage the province’s postcard coasts.

This is the story of how Canada’s Plan B rejoinder to Obama’s repeated Keystone delays became mired down, jeopardizing future oil-sands development and production at a cost, according to a Calgary research group, of more than C$400 billion ($365 billion) in lost economic growth over the next 25 years. It was put together after on- and off-the-record interviews with more than 60 government and industry officials, environmentalists and aboriginal leaders. Some government officials close to Harper asked not to be identified because they weren’t authorized to speak.

Go Forward

Jason MacDonald, Harper’s director of communications, said it “would be inaccurate to suggest that any one pipeline project constitutes a ‘plan.’” As for Canada’s long-term relationship with China, MacDonald said he expects the Harper government “in due course” to approve an agreement to promote investment between the two countries. A spokesman for China’s ambassador to Canada didn’t return calls seeking comment.

Harper, in a January interview, said he couldn’t discuss Gateway, yet was confident that “over time,” one of several projects being proposed to move oil-sands production to the Pacific or Atlantic coasts will go forward.

Ultimately, Harper’s cabinet has the final say as to whether the 1,177-kilometer, C$6.5 billion Gateway project is approved. A decision is required by mid June. To kill it could undermine his arguments that Keystone ought to be built, arming anti-Keystone factions with a powerful argument that Canada isn’t willing to practice what it preaches to Obama.

Legal Brawl

To approve it risks a political and legal brawl. Some green and aboriginal groups are already sounding warnings of massive civil disobedience and lawsuits in British Columbia if Harper says yes. To change the game – with adjustments to the route and revenue sharing, for instance – could conceivably buy peace, at a cost.

The government is “carefully” examining a Dec. 19 report by regulators on Northern Gateway, Natural Resources Minister Greg Rickford told reporters today in Ottawa. A regulatory panel recommended approving the pipeline subject to 209 conditions. The government’s decision will be based on “science and facts,” he said.

Mixed messages to China by the Harper government have also frayed relations between the two countries and damped Chinese enthusiasm for doing business with Canada.

Raw Ambivalence

“We’re long on rhetoric and short on strategic thinking and planning,” said Wenran Jiang, a University of Alberta China specialist who consults to the Alberta government and energy industry. “You can’t engage the second-largest economy in the world in such a way.”

Harper’s outreach on that February day in Guangzhou masked a raw ambivalence toward China and not just over human rights and religious repression. According to his security services, Harper also was critical of China’s espionage activities and intimidation of dissidents within Canada.

Against this principled Harper stood Harper the realist: The oil industry, centered in his home province of Alberta, increasingly recognized it needed new markets for its oil. When first elected prime minister, Harper had firmly embraced an anti-China wing of his party, adopting their belief that China needed Canada and its resources more than Canada needed China, according to advisers familiar with the strategy who asked not to be identified because they are not authorized to speak.

Cold Diplomacy

This led to an approach often described internally as cold diplomacy with warm economics. Harper showed his colors on his first Asia trip in November 2006 for an Asia-Pacific summit in Hanoi. The plan was for the relatively untraveled prime minister to keep a low profile, observe and learn, according to people familiar with the thinking.

Harper, though, had a message to send. He’d said he believed previous Canadian governments had been too accommodating to China. On the first leg of the journey, he wandered to the back of the plane and told reporters – in a reference clearly aimed at China -- Canadians didn’t want his government to sell out to “the almighty dollar.”

The remark, filed by reporters during a refueling stop in Anchorage, Alaska, landed like a bombshell in Hanoi. Chinese officials had already taken umbrage over the new Canadian government granting honorary citizenship to the Dalai Lama two months earlier.

Canceled Meeting

Now they canceled Harper’s scheduled one-on-one with Chinese President Hu Jintao, pro-forma for a new G-8 leader. Harper ordered his advisers to get the meeting back in the book, according to people who were there. The Chinese, still fuming, played cat and mouse before finally consenting to what diplomats call a pull-aside. If Harper wanted to meet Hu, the Chinese said, he could partake of a brief conversation just outside the men’s bathroom.

The Chinese also had a message to send.

Harper, as the Chinese knew, was worked up as well by the recent jailing of an ethnic Uighur imam, Husseyin Celil, a refugee from China who had emigrated to Canada in 2001 and obtained Canadian citizenship. China refused to recognize Canada’s right to consular access.

Outraged, Harper let no opportunity pass to press the case, broaching it directly with Hu outside the men’s room. Cabinet ministers and diplomats were instructed to protest at every meeting with a Chinese counterpart. It went on for years. Diplomats or ministers who didn’t toe the line got a sharp dressing down, according to people familiar with the policy.

Revised Version

Six months into Harper’s term, as members of the Canadian business community with Chinese interests began to question the new tone, a special cabinet session was held to discuss internal differences over the China policy. The Foreign Affairs department, as was standard, prepared an overview to kick off discussions. A group of young political aides in Harper’s office, judging it too tame, took control of the document and told Foreign Minister Peter MacKay to substitute their version, according to people involved in the discussions.

The tone was anything but accommodating: It played up fears of Chinese territorial ambitions and reached back to 1979 to critique the one-child policy as symptomatic of a society lacking moral grounding. Both sides dug in their heels; MacKay brought forward the version by the young turks. The session exposed cabinet divisions on China that persist to this day.

As the internal debate over China continued, the second question - how to get oil to Asia - still hung out there. The trade route from the oil sands to China ran through British Columbia. It was as green as you get, being, among other things, the birthplace of the environmental group Greenpeace.

Disputed Land

Also, few British Columbia aboriginal groups have settled treaties with the government, meaning the proposed Gateway route would have to traverse vast swathes of still disputed land claimed by First Nations, as aboriginal groups in Canada are called.

Gateway was the brainchild of Pat Daniel, who floated it soon after becoming Enbridge Inc. (ENB) chief executive officer in 2001 and was still on the scene in 2012, meeting Harper for the first time on the China trip. Long before anyone else, Daniel could see what he called “a big wave of oil sands crude coming towards us” that the existing marketplace was unlikely to absorb. A pipeline from the Alberta oil sands to the Pacific Ocean could change all that.

“Even with Keystone XL, Canadians still would not get full international pricing for their oil. Gateway goes to the real market, the world market, rather than just the U.S. market,” Daniel, 67, said in a recent interview. “If you’re an energy superpower and you’ve only got one market, one country, you’re not truly an energy superpower because people have too much control over you.”

Raucous Politics

The oil executives, however, would soon discover they had a lot to learn about British Columbia’s raucous environmental and aboriginal politics. In August 2009, Daniel and his pipeline president John Carruthers landed in a float plane at Hartley Bay, a sprawling cove of dark water hemmed in by fir-clad mountains. Supertankers would have to pass here from Gateway’s terminus point at Kitimat as they collected heavy crude for voyaging across the Pacific.

The Enbridge executives were to meet the leadership of a First Nation tribe called the Gitga’at to talk up the virtues of the project. Centered in Hartley Bay, the Gitga’at are known for three things: their courage, hospitality and a visceral love of their lands and water.

Ferry Rescue

One of their hosts was a local councilor named Marven Robinson. He had played a central role in a March 2006 incident when a ferry carrying 101 passengers and crew, the Queen of the North, ripped open its hull 16 kilometers (10 miles) from Hartley Bay. The Gitga’at rushed out to sea in the dead of night in small fishing boats and recreational vessels, saving all but two passengers.

Robinson, who had shuttled many of the survivors to shore, now wanted Daniel to understand why his people felt the waters around the village, with their warren of narrow channels, rocky islands and submerged reefs, constituted an inappropriate venue for supertanker traffic. Robinson, in an interview, said he told Daniel, “We see exactly how this kind of thing will be dealt with and that’s why we’re so against tankers in our territory.”

Historical Sites

As was their custom, the Gitga’at wanted to lavish their guests with hospitality. Daniel and Carruthers, fearing the weather was worsening, chose to get back on their Twin Otter and skipped a tour of historical sites, further alienating the locals, according to people familiar with the incident.

Over the next several weeks, Carruthers, who confirmed he and Daniel left early, said he called to ask how he could help persuade the Gitga’at to change their defiant no to Northern Gateway into a yes. The answer was he couldn’t.

Today, the community of 200 is plastered with “no tankers” signs along the wooden boardwalks. The foyer of the school is adorned with ceremonial canoe paddles, cedar-fiber weavings and student presentations encouraging fellow residents to “defend our planet against attacks by corporations like Enbridge.”

The depth of the disdain runs deep. British Columbia Premier Christy Clark, who has kept her distance from the project, recalled the feedback she got from a Grade 6 student when she visited a school to talk about debating. “Dear Ms. Clark. Thank you for coming and speaking to us about debating. It’s really going to help me get a good mark. And also, I hope you will decide you want to hate Enbridge,” the student wrote.

National Interest

If the Enbridge team saw its overtures rebuffed, Harper’s people were faring little better in their belated effort to get Gateway moving. In January 2012, just as Obama rejected Keystone, regulatory hearings into Northern Gateway were set to begin. Natural Resources Minister Joe Oliver had already caused a stir six months earlier, in what may have been a slip of the tongue, by citing the project as being in the national interest. Environmentalists accused the government of bias.

Oliver raised the temperature further on the eve of the hearings by releasing an open letter denouncing “environmental and other radical groups” for trying to hijack the country’s regulatory system by exploiting “any loophole they can find,” stacking public hearings to ensure delays that would “kill good projects” and using “funding from foreign special interest groups to undermine Canada’s national economic interest.”

‘Little Late’

Oliver’s broadside, at a time when the government was trying to shore up support, only fomented more criticism, both inside and outside government. “By attacking all the groups that were raising environmental concerns, those groups were branded as radicals, pretty much described as enemies of Canada,” said Grand Chief Stewart Phillip, president of the Union of British Columbia Indian Chiefs. Oliver would later try, unsuccessfully, to persuade Phillip into supporting the government’s resource-development agenda. The chief told the minister, “it’s a little late in the day.”

Oliver, now finance minister, said the letter wasn’t him going rogue or off message. The industry has done a poor job parrying green criticisms, he said. “We needed to get people’s attention and say, ‘Well wait a minute, that’s been the prevailing narrative but it’s simply not true.’”

The emerging coalition of environmentalists and aboriginals opposing the Harper government’s economic imperative of getting oil-sands production to market was driving the project’s proponents to distraction. They would soon be joined by celebrities.

Alberta Support

Progressive Conservative Alison Redford, who had won a surprise victory in October 2011 to become Alberta’s premier, said in an interview that she remembered looking up at the television late one night after her victory as she puzzled over all the pipeline opposition.

Shocked, she saw a trailer scrolling across the bottom of a news channel with a headline, “Redford opposes Northern Gateway.” An ardent Gateway backer, Redford, who stepped down in March for unrelated reasons, said she was beside herself, fearing some remark made by her rookie team had been misconstrued. “We screwed up big time,” she remembered thinking.

Actually, it was actor Robert Redford.

All sides agree on one point. Enbridge, accustomed to oil-friendly Alberta with its capillary veins of pipe running in all directions, misjudged the temperament of British Columbia, and particularly the green, anti-oil leanings of the First Nations peoples.

Non Grata

In late 2012, Al Monaco replaced Daniel as Enbridge CEO. Though Calgary-based Enbridge has made subsequent overtures to the Gitga’at and other tribes, opposition has if anything hardened. The company remains persona non grata in many quarters.

Premier Clark, according to people close to her, has quietly ducked every opportunity to meet with Monaco or other Enbridge executives. Even pipeline champion Oliver has his limits. While attending an energy conference in Houston last year, the consulate had scheduled him for a photo op with Monaco. He was willing to meet but made it clear there would be no photo, according to a person privy to the conversation.

Monaco, in an interview, conceded mistakes were made. “There are things we could have done differently,” he said. “We probably should have spent more time building trust.”

Enbridge has adjusted how it engages communities, according to Monaco, pointing to establishing community advisory boards and taking opponents to Michigan to see how it has dealt with a serious 2010 spill into a tributary of the Kalamazoo River.

First Visit

On the China front, things remained complicated. Harper’s embrace of China had been long in coming and short on his normal all-in gusto. In 2008, he had taken a controversial pass on the Beijing Olympics and he did not arrive for his first visit until December 2009 -- almost four years after coming to power.

The biggest influence on his evolving attitude, say people familiar with his thinking, was the 2008-09 economic meltdown. It made plain that China was simply too influential to keep at arm’s length. Canada’s share of trade and investment were falling and the Chinese leadership had withheld an economically significant tourism designation from Canada.

“After the financial crisis, we recognized that China is too important not to treat more subtly,” said Mark Cameron, a senior Harper policy adviser who shared the initial aversion to China. “We had that luxury in the early years. The economy was going well. Now we had to talk to them on their own terms.”

Settling Scores

The 2009 trip started with a verbal settling of scores. “This is your first visit to China and this is the first meeting between the Chinese Premier and a Canadian prime minister in almost five years,” then-Premier Wen Jiabao publicly scolded Harper. “Five years is too long a time for China-Canada relations and that’s why there are comments in the media that your visit is one that should have taken place earlier.”

According to David Mulroney, Harper’s hand-picked ambassador, China was frustrated by Canadian policy. It had invested in Australia with positive results and wanted to diversify to Canada. It had been waiting for Harper to come around.

Post-Guangzhou, Harper’s changed tone had become clear. In 2007, upon a visit by the Dalai Lama, he made a big fuss over him, including a rare photo-op in his Parliament Hill office, despite knowing it would annoy the Chinese. Now, in 2012, with the Dalai Lama again in Ottawa two months after the Guangzhou speech, Harper kept it to “a private courtesy meeting” – a brisk 20 minutes on a Friday afternoon. The Harper policy looked much like all those other countries beating a path to China.

Nexen Drama

Then came the drama over Nexen Inc. In November 2011, when Obama phoned Harper to tell him of the Nebraska-related Keystone delay, Oliver, a former investment banker, had already had been working China both as a market and a source of investment. Word was that Harper had immediately dispatched Oliver to China but “actually, I was already there,” Oliver recalled.

One of the major deliverables from the February 2012 China visit had been a Foreign Investment Promotion and Protection Agreement, a pact Harper hailed following a meeting with Premier Wen in the Great Hall of the People. It needed only its t’s crossed and i’s dotted.

At the same time, Oliver and a handful of energy industry CEOs were meeting Wang Yilin, chairman of Cnooc Ltd., (883) China’s biggest offshore oil explorer. Seven months earlier, Cnooc had purchased Opti Canada Inc., a failed petroleum producer with a minority stake in an oil-sands project in Long Lake, Alberta.

Market Principles

Oliver and Wang waxed enthusiastic over possible deals, Wang assuring the Canadian that Cnooc was run on market principles. Calgary-based Nexen owned the rest of the Long Lake project. Throughout the five-day trip, Harper hammered home the message about a new era of energy relations. Cnooc interpreted the pitch alongside Oliver’s effusiveness to mean the Canadian government wouldn’t stand in the way if Cnooc tried to acquire Nexen, according to a person familiar with the company’s thinking.

In the previous seven years, Chinese state-owned enterprises such as PetroChina Co. and China Petrochemical Corp. (386) had put $11 billion into minority positions in oil-sands projects. Cnooc decided the time had arrived for a bold stroke. On July 23, 2012, five months after the Harper visit, the company launched a $15.1-billion offer for Nexen, the biggest Chinese foreign takeover attempt in the world.

The Conservative political base recoiled at the prospect of Canadian resources falling into the hands of Chinese state-owned enterprises and Harper’s old doubts about China resurfaced, according to people privy to his thinking. The leading cabinet naysayer was Jason Kenney, who, first as Harper’s parliamentary secretary and later immigration minister, had built enough influence through his courting of Conservative-leaning ethnic communities to be touted as a leading contender to eventually succeed Harper.

Exceptional Circumstances

He took it upon himself to investigate how Cnooc might be blocked, organizing a meeting with investment bankers, corporate lawyers and the grandees of the oil industry at the venerable Calgary Petroleum Club. A consensus emerged that further incursions by Chinese state-owned enterprises would imperil Canadian control over the oil sands -- jeopardizing jobs in Calgary and technological leadership over unconventional oil recovery methods.

Eventually, Harper held his nose and approved the deal, worried that to kill it would send the wrong message to other foreign investors. He made plain though that any future takeovers in the oil sands by state-owned enterprises would only be approved in the most exceptional of circumstances. “To be blunt,” he told a press conference televised live, “Canadians have not spent years reducing the ownership of sectors of the economy by our governments only to see them bought and controlled by foreign governments instead.”

China Irritant

And to date, more than two years after Guangzhou, the Foreign Investment Promotion and Protection Agreement remains unratified by the Harper government, something the University of Alberta’s Jiang cites as an irritant to China.

Former Ambassador Mulroney says the February 2012 visit was the high water mark of relations. While many nations struggle with how to deal with China, he said “it’s very acute in Canada.” Reflecting back on Guangzhou, he added, “One speech does not a strategy make.”

Meanwhile, there is a Plan C should Gateway be stalled. It involves shipping oil-sands production through a series of existing and new pipelines across Canada to the large Irving Oil Ltd. refinery on the Atlantic Coast for export, along with a proposal to twin an existing pipeline that runs from Alberta into the port of Vancouver. Along with oil-by-rail and increases in capacity to other U.S.-bound pipelines, the oil sands is feeling some temporary relief.

Rookie Prime Minister

Still, eight years after a rookie prime minister first laid out his energy vision for Canada, the country remains more energy warehouse than energy superpower, said Wendy Dobson, a former senior finance department official and pipeline company director who runs the Institute for International Business at the University of Toronto. She and former Ambassador Mulroney both see a real risk of changes in the Chinese energy market occurring before Canada gets its ducks in a row on Gateway. Jiang adds the Chinese will not sit around waiting. “They are actively pursuing everything at the same time.”

As with Keystone, the stakes are high for Canada and for Harper’s energy superpower goal. Oliver, who has lived the issue more closely than anyone, considers the pipeline challenges “pivotal to our economic future.” Without a major new outlet for the oil sands, “which is unthinkable, the resources are stranded and the legacy’s lost. There will be negative, if not dire, economic consequences.”

-With assistance from Theophilos Argitis in Ottawa.

-With assistance from Theophilos Argitis in Ottawa.

To contact the reporters on this story: Edward Greenspon in Toronto at +1-416-203-5708 or egreenspon@bloomberg.net; Andrew Mayeda in Ottawa at +1-613-667-4801 or amayeda@bloomberg.net; Jeremy van Loon in Calgary at +1-587-702-3028 or jvanloon@bloomberg.net; Rebecca Penty in Calgary at +1-587-702-3025 or rpenty@bloomberg.net To contact the editors responsible for this story: David Scanlan at +1-416-203-5722 or dscanlan@bloomberg.net Ken Wells

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