UPDATE: China In Talks On Canadian Oil, Rail - Canada Official

Canadian National Railway Co. (CNI) and some Chinese companies are in talks about possible exports of crude oil produced in Canada's inland province of Saskatchewan via railway to a West Coast port, Saskatchewan's energy and resources minister said Monday.

"We believe this has a real potential," said the minister, Bill Boyd. He didn't specify which ports or oil fields might be used, adding that the discussions are at "a very early stage."

Saskatchewan--the second-largest oil-producing province in Canada after Alberta, as of the end of 2009--has recoverable reserves of 1.2 billion barrels of crude.

The U.S. is the major export market for Canadian crude oil.

Canada has vast deposits of oil, although nearly all its estimated 178 billion barrels of reserves--second only to those in Saudi Arabia--are in oil sands.

A spokeswoman for Canadian National Railway confirmed it is in discussions with several Canadian oil producers to ship oil to West Coast ports, possibly to refineries on the U.S. West Coast, as well as Asia. One of Saskatchewan's largest energy producers, PetroBakken Energy Ltd. (PBN.T, PBKEF), said it is participating in those discussions.

"It makes good business sense to have more than one customer," both in terms of sales volumes and the possibility of having stronger prices, Boyd said.

"There are a number of locations" from which crude produced in the province could be sent by train to the Pacific coast, he said, and this could involve building lines linking oil fields to existing main lines. Chinese companies appear to be "very interested in this opportunity" too, he added.

Last week, another Saskatchewan official said that a "significant" energy deal was in the works between China and the province.

Richard Choi, the head of Saskatchewan's trade and investment representative office in Shanghai, said a deal could be finalized in May. It is unclear whether that deal is related to the talks regarding shipments of crude to the coast by rail.

The remarks from the two provincial officials follow news Thursday that state-owned China Petroleum & Chemical Corp., or Sinopec (600028.SH), is among a consortium of Canadian oil producers and Asian refiners investing $100 million in Enbridge Inc.'s (ENB, ENB.T) proposed Northern Gateway pipeline.

That project, which is awaiting approval, aims to pipe 525,000 barrels of crude oil a day from Canada's oil-sands region to a port in British Columbia, from where it would be shipped to Asian markets.

China, which has been investing aggressively in energy assets globally to feed its rapidly growing economy, clearly has set its sights on Canada.

Last year, Sinopec bought a 9% stake in Syncrude, Canada's largest oil-sands project, for $4.65 billion, while state investment agency China Investment Corp. bought a 45% stake in an oil-sands project owned by Penn West Energy Trust for 817 million Canadian dollars (US$821 million).

In 2009, PetroChina Co. (PTR) bought a majority stake in Athabasca Oil Sands Corp. (ATH.T, ATHOF) for $1.7 billion.

Boyd and accompanying officials are touring China and Japan from Jan. 16 to Jan. 28.

In China, Boyd met officials of China's National Development and Reform Commission, the China National Petroleum Corp., the China National Nuclear Corp. and China's National Energy Administration, among others.

In Japan this week he plans to meet officials of the Japan Coal Energy Center, Idemitsu Kosan Co. (5019.TO), Tokyo Electric Power Co. (9501.TO), Japan Canada Uranium Co. and Overseas Uranium Resources Development Co. The last two are joint ventures involving Japanese utilities investing in uranium mines.

China became the world's second-largest crude-oil importer after the U.S. in 2009, and the world's second-largest economy after the U.S. in 2010.

It is becoming increasingly dependent on imported energy. In 2010, China imported an average of 4.81 million barrels a day of crude oil, up 18% from the previous year.

-By Mari Iwata, Dow Jones Newswires; 813-6269-2798; 
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--Edward Welsch in Calgary contributed to this article.