CANADA-CHINA TRACK II ENERGY DIALOGUE Framing Paper
CANADA-CHINA TRACK II ENERGY DIALOGUE - FRAMING PAPER I
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CANADA-CHINA TRACK II ENERGY DIALOGUE - FRAMING PAPER
FRAMING PAPER
CANADA AND CHINA HAVE BENEFITED FROM A LONG AND POSITIVE RELATIONSHIP, even before the formalization of relations in 1970 under Pierre Elliot Trudeau’s government. Despite this long-standing positive relationship and various mutual interests, Canada has at times struggled to deepen its engagement with China. China now matters for Canada’s prosperity and security in unprecedented ways. On the economic front, China is the world’s second-largest economy and is on track to become the largest in the near future. China is also Canada’s second-largest trading partner, and Canada is seeking to expand and diversify its exports of goods and services. Canada and China announced in 2016 their shared goal of doubling bilateral trade by 2025. In the energy and environmental sectors, Canada and China have the potential to benefit from significant complementarities between their economies. In an economic complementarity study conducted in 2012, the Canadian government identified clean technology, environmental goods and services, and energy as areas where there was great scope for collaboration and growth in terms of trade and investment. China is reliant on imports of energy and natural resources while Canada has a comparative advantage in supplying those imports from its rich reserves. Furthermore, Canada is a politically stable, competitive, and reliable energy supplier to the world, and its energy sector includes some of the world’s leading publicly listed companies. Canada, with a vast territory and a small population, a developed economy, and a large natural resource base, has among the largest energy resources in the world. Its tremendous hydroelectric generating capability, large proven oil reserves, natural gas, and uranium all make Canada a significant global energy producer and exporter. Canada is also a world leader in the production and use of energy from renewable resources. It has large landmass, diversified geography, and substantial renewable resources, such as moving water, wind, biomass, solar, geothermal, and ocean energy.
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Fossil fuels accounted for the greatest share of Canada’s production of primary energy, with crude oil accounting for 37%; natural gas, 40%; coal, 9%; and nuclear, 2%. Renewable energy sources are also important, with hydroelectricity representing 8% and other renewables such as wind, tidal, and solar energy accounting for 4%. In 2015, 60% of primary energy produced in Canada was destined for export markets, close to 99% of which went to the United States. China is also one of the world’s largest energy producers. It has built up a comprehensive energy supply system comprising coal, electricity, petroleum, natural gas, and new and renewable energy resources. However, its energy development still faces many challenges. The country’s energy resources are not high and its per-capita share of coal, petroleum, and natural gas is low. Its energy consumption has grown too quickly in recent years, increasing the strain on energy supply. Fossil energy resources have been exploited on a large scale, causing a certain amount of damage to the environment. To curb excessive consumption of energy resources, China keeps strengthening its efforts in energy conservation and emissions reduction, and strives to raise the efficiency of energy utilization.
CANADA-CHINA TRACK II ENERGY DIALOGUE - FRAMING PAPER
China is also increasingly turning to clean and renewable energy sources as concerns about pollution, climate change, and environmental damage are driving Chinese planners to increase energy efficiency and reduce greenhouse gas emissions. Reducing dependency on fossil fuels has thus become an important pillar of China’s forward-looking energy strategy and has opened the door for new types of collaboration with international partners. For the near future, China’s industrialization and urbanization will continue to accelerate, and the demand for energy will keep increasing.
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The global energy environment has changed dramatically in the last decade, presenting Canada and China with important opportunities and challenges as energy producers and exporters. While global growth in energy demand is slowing, China’s share of that demand is increasing. It is estimated that by 2035, China will account for 28% of the world’s primary energy demand, up from 23% today, whereas the United States could account for just 12% by 2035, down from 16% today. The International Energy Agency has projected that China’s energy demand will increase by 30% between 2013 and 2035, while researchers at the Chinese Academy of Sciences calculate that China will depend on imports for 80% of its oil consumption and 40% of its natural gas consumption. Indeed, McKinsey & Company estimates that China alone will account for over 40% of the global growth in energy demand by 2030, which highlights the shift in the growth of energy demand from North America and Europe to Asia.
Energy exports to China currently represent a minor proportion of Canada’s energy exports. Over the past decade, the value of energy exports to Asian markets ranged from 1% to 5% of Canada’s energy exports. Meanwhile, the United States has consistently been the principal destination for Canada’s energy, accounting for an average of 93.7% of Canada’s energy exports over the same period. Recognizing their commitment to a low-carbon future and their shared goals of developing clean energy, improving energy efficiency, promoting the sustainable development of natural resources, and deepening their trade relationship, Canada and China signed a joint statement on September 23, 2016, in which they agreed to create a Track II dialogue on energy. The purpose of the dialogue as agreed is to examine energy policies of the two respective countries and propose a set of recommendations for enhancing trade and investment in energy-related goods and services through policy options and activities.
CRUDE OIL AND PETROLEUM PRODUCTS Canada has abundant resources of crude oil, with a proven reserve of 178 billion barrels. Of this, oil sands account for 90% and conventional oil accounts for 10%. There are two major producing areas in Canada: a) the Western Canadian Basin, which includes Alberta, Saskatchewan, and parts of British Columbia and Manitoba, and b) offshore Eastern Canada. Although Canada is the sixth-largest producer in the world, it produces only about 4% of total daily production, so it does not have a significant influence on
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the world price of oil. In 2013, 71% of Canadian crude production was exported to the United States and 2% was exported to overseas markets. Canadian oil shipments to China are negligible (less than 2% of Canada’s exports) due to producers’ inability to transport oil to deep-water ports (except for transshipments through the United States). However, China’s top three oil companies have established offices in Calgary: China Petroleum and Chemical Corporation (Sinopec Corp.), China National Offshore Oil Corporation (CNOOC), and China's largest oil and gas producer and supplier, China National Petroleum Corporation (CNPC).
Main challenges
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Lack of crude oil pipeline infrastructure domestically;
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Lack of cross-Pacific infrastructure to effectively supply China; and
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Acquiring social licence for oil extraction and transport.
CANADA-CHINA TRACK II ENERGY DIALOGUE - FRAMING PAPER
NATURAL GAS Canada is the world’s fifth-largest producer of natural gas and accounts for around 5% of global production. Natural gas production in Canada is predominantly from the Western Canadian Basin in British Columbia, Alberta, and Saskatchewan. At present, a number of liquefied natural gas (LNG) projects are being proposed in British Columbia and Eastern Canada, 24 of which have secured export licences from the National Energy Board.
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Canada has an enormous supply of natural gas that is forecast to exceed national demand for well over 380 years. China, on the other hand, has a significant and growing need for energy, and its demand for natural gas is growing rapidly. Its LNG imports have more than tripled in the last six years, and they will continue to grow. By next year, China is projected to become the world’s second-largest LNG importer, as the country is in the midst of an ambitious effort to increase the industrial use of natural gas. China has set a target to raise the natural gas share of its energy mix from the current 5.9% to 10% in 2020. As China seeks diversified sources of gas to meet its natural gas demand, Canada is well positioned to be a reliable and competitive supplier.
Main challenges
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Lack of infrastructure, such as LNG regasification facilities, transmission pipelines, and distribution pipelines to meet business, industry, and residential demand;
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Lack of truck, train, and marine facilities to enable the use of LNG in heavy-duty equipment;
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Reducing costs to ensure Canadian LNG is globally competitive; and
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Acquiring social licence for production.
NUCLEAR ENERGY AS CLEAN TECHNOLOGY/CLEAN ENERGY Canada has more than 60 years of nuclear power experience, including in uranium mining; the design, construction and operation of nuclear power plants; decommissioning; waste management; and regulation and governance – all of which has made Canada a Tier One nuclear nation. In 2016, Canada produced 3.9% of the world’s total nuclear energy output. This ranked Canada sixth in the world behind the United States, France, China, Russia, and South Korea. The majority of nuclear energy in Canada is produced in Ontario, which alone accounted for more than 3.7% of global nuclear output. Within Canada, 18 of the country’s 19 operating reactors are in the province of Ontario. China currently operates two CANDU 6 reactors in Qinshan, and now Canada and China are negotiating a joint venture to build an Advanced Fuel CANDU reactor that would recycle used fuel from the existing light-water reactors. Canadian engineering company SNC-Lavalin is already working with China to build reactors in Romania and Argentina.
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Canada has the fourth-largest uranium reserve after Australia, Kazakhstan, and Russia, and it currently exports 80% of its uranium, mainly to North and South America (36%), Europe (23%), and Asia (41%). According to the International Energy Agency, the annual demand for uranium for nuclear power plants will almost double by 2040 to about 100,000 tonnes; much of this demand will come from Asia, with China projected to be the world’s largest uranium consumer by 2035. Uranium fuel, if it displaces fossil fuels, would contribute to reducing greenhouse gas emissions.
CANADA-CHINA TRACK II ENERGY DIALOGUE - FRAMING PAPER
Main challenges
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CANDU (pressurized heavy-water reactor) technology’s need for wider Chinese acceptance/support;
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Lack of Chinese nuclear facilities on International Atomic Energy Agency’s voluntary offer list means Canada cannot supply uranium or nuclear equipment under current Nuclear Cooperation Agreement terms;
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Issues around intellectual property protection and technology transfer that need to be addressed; and
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Lack of opportunity for Canadian companies to gain access to Chinese markets through competitive bidding.
CLEAN TECHNOLOGIES AND RENEWABLE ENERGY The clean technology sector is an innovative and rapidly growing sector globally. As highlighted in its most recent Five-Year Plan, China has shown a keen interest in adopting clean technologies and renewable forms of energy in order to address growing domestic environmental challenges. For example, at the start of 2017, China announced that it would invest $360B in renewable energy by 2020 and scrap plans to build 85 coalfired power plants. China is truly at the centre of a global energy transformation that is being driven by technological change and the falling cost of renewables. Main challenges
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Canadian companies tend to be small and will need investment and assistance to scale up sufficiently to be seen as viable players in the Chinese market;
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Canadian companies need to better understand where the market opportunities in China lie, and get solid advice and support to capitalize upon them;
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There are barriers to doing business in China relating to language, transparency, currency, intellectual property rights, etc.;
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The lack of a renewable energy- or marine energy-specific tariff means that it is not obvious what the market opportunity is; and
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It is difficult to find current information about renewable energy market opportunities, research, etc.
ENERGY EFFICIENCY Since the 1980s, the Chinese government has successfully implemented a series of policies to stimulate energy efficiency in a major effort to partially decouple energy and economic growth. From 1980 to 2010, energy consumption in China increased 5-fold while its economy increased 18-fold. China is one of the few countries in which energy demand has consistently grown significantly less rapidly than its gross domestic product. Energy efficiency policies have helped unlock significant energy savings for Chinese industry, and energy service companies are thriving in what has become the world’s largest energy service market. However, despite the improvement in energy efficiency, Chinese industry remains 50% more energy intensive than International Energy Agency member countries.
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CANADA-CHINA TRACK II ENERGY DIALOGUE - FRAMING PAPER
Main challenges
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Canadian companies seeking to serve Chinese markets do not have a clear understanding of the current or emerging opportunities, nor the Chinese regulatory environment (e.g., product efficiency standards);
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Canadian manufacturers of energy efficient products are small in size and few in number, and they may lack the scale and sophistication to tackle the Chinese market;
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Canadian service providers have extensive expertise but may find it difficult to navigate Chinese government procurement processes for services;
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Where there is an ability to explore opportunities, Canadian companies may be reluctant to do so out of concern for intellectual property protection;
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Trade in energy efficient products may be hampered by differing product specifications and energy efficiency testing and performance standards between countries; and
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Varied regulatory environments among provinces (e.g., energy efficiency standards/ codes) may present an additional challenge for foreign manufacturers seeking to serve the whole Canadian market.
INDIGENOUS INCLUSION China is becoming increasingly important as an export market and source of investment to areas of Canada’s economy in which Indigenous Peoples (First Nations, Métis, and Inuit) have substantial business interests. This is particularly the case in the energy and natural resource sector. In the past decade, Chinese companies have invested billions in energy projects in Western Canada, raising the question of how Chinese investment will benefit Indigenous communities on whose traditional territories many energy development projects take place. Under the right circumstances, Chinese investment has a great deal to offer Canada’s Indigenous Peoples, who claim millions of cubic kilometres of resource-rich lands. There is not one Indigenous perspective on energy. Perspectives may vary in geographical areas, with each community approaching the development separately. Canada has 634 First Nations, Métis, and Inuit groups. Indigenous Peoples who share traditional territories may have different perspectives as to how they will engage in an energy project. The Supreme Court of Canada has indicated that there is a need to consult and
accommodate Indigenous Peoples for the impacts of energy development on their lands. This may be in the form of ownership in projects, joint ventures, partnerships, impact benefit agreements, education, training opportunities, and employment creation.
Main challenges
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Indigenous competency: Chinese government officials and business owners are generally unaware that Indigenous Peoples have rights and title to specific lands in Canada and must be consulted and accommodated on energy development projects. Failure to do so can significantly slow or even stop projects from proceeding;
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Indigenous communities have varied skills and capacity to engage in energy projects, from no capacity to partnerships worth billions of dollars; and
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There is not only one perspective on energy — for example, some Indigenous communities will choose to engage in one form of energy over another.
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