BEIJING: A Chinese company’s gambit to drill for oil in US territory demonstrates China’s determination to lock up the raw materials it needs to sustain its rapid growth, wherever those resources lie.
The state-owned China National Offshore Oil Corp, or CNOOC, reportedly is negotiating to purchase leases owned by Norway’s StatoilHydro in US waters in the Gulf of Mexico. China’s push to enter US turf comes four years after CNOOC’s $18.5bn bid to buy El Segundo, California-based Unocal Corp was scuttled by Congress on national-security grounds. Unocal eventually merged with San Ramon, California.-based Chevron Corp.
Whether CNOOC’s second attempt to lock up US petroleum assets will trigger a similar political backlash remains to be seen. The sour US economy and the need for Washington and Beijing to cooperate on potentially larger issues could mute outcry. The US also could find it difficult to rebuff China when it has long welcomed other foreign investment in the Gulf of Mexico. In addition to StatoilHydro, foreign oil companies with stakes in deep-water projects there include Spain’s Repsol, France’s Total, Brazil’s Petrobras, British oil giant BP and the Dutch-British multinational Shell.
The United States risks undercutting its foreign-policy goals as well. Concern is growing over China’s aggressive investment in oil-rich nations with anti-US regimes, including Iran and Sudan. Denying China a shot at drilling in U.S. waters would only encourage Beijing to make deals in volatile regions, given that new oil reserves in stable, democratic nations are harder to find.
“China doesn’t have a lot of alternatives,” said Ben Simpfendorfer, chief China economist for the Royal Bank of Scotland. “They’re very late to the game.” China, the world’s third-largest economy, is already the second-largest consumer of oil, with demand for 8.2 million barrels a day, behind the US at 18.4 million barrels a day. The Asian giant’s consumption surpassed its domestic production capacity in the early 1990s; it now imports about half its daily needs. China’s consumption is projected to grow 31 percent between 2008 and 2010, according to the U.S. Energy Information Administration.
Beijing has urged the nation’s four major state-run oil corporations — China National Petroleum Corp, Sinopec, CNOOC and Sinochem — to acquire more international assets. “Their predicament is they have growing demand and stagnant local supply of oil. So they are looking for sources abroad,” said Leo Drollas, deputy executive director and chief economist of the London-based Centre for Global Energy Studies.
To that end, China has been scouring the globe to slake its thirst for oil. The CNOOC-StatoilHydro deal, which was first reported last week by Dow Jones Newswires, has yet to be confirmed by Chinese officials. But if it comes to pass, it will be just one of a slew of natural-resources pacts cut by China since the global recession began. Armed with record holdings of foreign reserves, the oil-hungry nation has spent billions locking up supplies at a time when crude oil prices are half what they were just over a year ago.
At $14.9bn so far this year, the value of Chinese oil and gas mergers and acquisitions in 2009 is already double last year’s figure, according to research firm Dealogic.
The largest this year was Sinopec’s $8.9bn purchase of the Swiss oil-exploration company Addax Petroleum Corp. The deal, announced in June, gave the Chinese access to potentially vast oil deposits off the coast of West Africa and in northern Iraq. China also has extended huge sums of credit, including a $25bn loan to Russian companies Rosneft and Transneft to pay off debt and develop the East Siberia Pacific Ocean pipeline in exchange for 300,000 barrels of oil per day.
The Chinese Development Bank lent Brazil’s Petrobras $10bn to help with its $170bn, five-year plan to increase its crude oil output. In exchange, Petrobras agreed to give the Chinese 200,000 barrels of oil exports a day. China extended a $4bn loan to Venezuela to expand various oil projects, according to the Energy Information Administration. Chinese companies reportedly are eyeing new oil deals in Nigeria and Ghana. The positive effect of all that investment, some analysts said, is that Beijing is helping to expand the world’s oil supply at a time when major oil companies have scaled back.
“The (global economic) crisis has put a stop in foreign company expansion plans, freezing mergers and acquisitions because profits are deteriorating,” said Lilian Luca, chief operating officer for the advisory group The Beijing Axis. “China remains one of the few sources of capital.”
But much of that capital is being funneled to governments with poor human-rights records and links to terrorism. China’s importation of crude oil from war-torn Sudan increased 13.8 percent in August from a year ago, according to Chinese state media. Imports from Iran jumped 14.7 percent in the same period. Over the past five years, China has signed an estimated $120bn in oil deals with Tehran — money some worry will undermine efforts of the US and its allies to tighten economic sanctions against Iran.
China has defended its most controversial oil deals, contending that its investments eventually will spur stability in troubled states. China’s shopping spree has been aided by the nation’s foreign reserves, which recently reached a record $2.2 trillion — about two-thirds estimated to be in US dollars. Buying natural resources is a way for China to diversify holdings that have been heavily concentrated in US securities.
Despite the recent activity, analysts say China’s oil production overseas will take years of development before it can match long-established companies such as Exxon-Mobil and BP. “Yes, China is being aggressive,” said Arthur Kroeber, managing director of Dragonomics, a Beijing economic research firm. “But they’re starting from a lower base. They’re basically picking up the crumbs off the floor.”
