The story of how China’s oil and gas companies became global players

Chinese energy companies are the arrivistes of this huge global industry, wealthy, ambitious, but lacking the high tech drilling technology and years of experience that the western majors have. Instead Sinopec and the other Chinese majors have been left with the politically risky, authoritarian and downright dangerous countries in which to develop much of their international portfolios.

As soon as China’s demand began to outstrip its own domestic supplies, the government directed its state owned oil companies to begin securing oil from abroad. Early deals to secure supplies from Angola passed relatively unnoticed, the Southern African state was conflict ridden, forgotten by the major powers following the end of the Cold War, when various internal factions backed by the CIA, KGB and others were quickly dropped, suddenly unimportant in the wider context of a post-Soviet and Socialist world.

Angola had an embattled, war-exhausted government faced by a number of rebel groups, now stripped of the veneer of ideology on one side and also the IMF then operating at the height of the Washington Consensus, which created onerous conditions for the extension of further finance. The Angolan government’s failed multiple IMF programs throughout the 1990s, mixing lending from Washington and from major European banking powerhouses.

The Chinese entered this scene with an innovative compact, the template of what would follow in Africa, Latin America and beyond. Chinese finance offered low, yet not nakedly un-commercial rates of interest and a long repayment period, not a world away from those offered by the World Bank’s sovereign lending arm, the International Bank for Reconstruction and Development.

The Angola Model

Where Chinese finance mutated into its unique form was the use of the loan, Angola’s colonial neglect, followed by years of civil war had destroyed its infrastructure, the credit from Beijing was specifically earmarked for the rebuilding of the country. While many critics of China see its role in Africa as a master plan, to control natural resources, but this ignores the fact it also saw a big business opportunity in Africa. Angola benefited from selling China more oil at a time of rising prices, at the same time Chinese construction firms begun building the roads, bridges and buildings across the war-torn, landmine riddled country.

The entry of Chinese construction firms into Africa is perhaps where they distinguished themselves apart from European companies. European firms were still primarily interested in natural resource investments bar a few exceptions, saw far less commercial potential in the continent. The common assumption about Chinese demand for natural resources should be turned on its head, the purchase of natural resources, acts a catalyst for the entry and development into one of the world’s last underdeveloped regions. A whole continent in need of modern infrastructure was a perfect match for a rising power with hundreds of firms all with recent experience of building bridges, roads and ports all across China, and now looking to start overseas expansion.

Expansion across Africa

Chinese oil firms expanded across Africa, although they were taking the scraps left by the western majors, left with little choice but to take acreage in whatever tough, remote or expropriation happy regime which happens to have the oil supplies. But the Chinese government is also playing a deeper, longer term game, by engaging with African governments, through a mixture of flattery, non-condescending friendship, a non-interference policy and win-win business partnership rhetoric. Beijing has given every Chinese company pitching for business in Africa an advantage, through the use of political energy and persuasion and the tireless work of its diplomats in pushing Chinese interests.

Beijing has also become a buyer of South American oil, primarily Venezuelan and Ecuadorian, although they cannot compete with the US in this regard, the China factor has become an attractive alternative to the US.

Opportunities in the energy sector

China has the ambition and the demand for hydrocarbons, but often lacks the expertise to get them, in age where tapping into hard to reach supplies in remote locations is key such as deep under the sea, having the right technology is vital and is something that the state owned oil companies of China lack. The companies that can provide them with the right technology or offer acreage to the world’s biggest energy user will come up trumps.

Oil remains king of global energy use, despite the contributions made by renewables, nuclear and gas, oil keeps the wheels of the world economy turning (at least for now), the Chinese are well aware of this and have made access to oil supplies and production a key part of their foreign policy, relations with Angola and Sudan and South Sudan, then more recently Saudi Arabia have all hinged around oil supplies.

Chinese companies will be seeking new acreage, existing market share and new technology. Chinese oil firms have faced a great deal of resistance in a world dominated by state owned oil companies, protected by nationalistic governments keen to protect their country’s oil wealth (or pilfer it for themselves).

Companies that are able to offer Chinese oil companies cutting edge techniques such as deep sea and offshore drilling as well as other technology not currently available to them, that will help them catch up to the western majors can offer a lot. Chinese firms will also be looking for mergers and takeovers that can speed up the modernisation of their own working practices. Chinese oil companies like Sinopec and China National Offshore Oil Company (CNOOC) are state owned and although they have adapted and become more responsive and market friendly, in other ways they are still very inefficient, with excess staff (staff to turnover ratio), which compares poorly to private firms in developed nations.

The announcement of a ten years in the making mega gas deal between Russia and China was given acres of press coverage and appeared to mark a seismic shift in relations between Russia and China, drawing them closer together at a time when Russia had fallen out with the west. The deal was much lauded by the Chinese and Russian governments as it would provide China with much needed energy and Russia with revenue, but it is easy to forget that it came after years of negotiation over price and it is still unclear how far the Russia will allow the Chinese to invest and learn from their oil and gas industry. While naturally the Russians want more investment they do not want to give all their technological secrets away and there is already a growing fear that China has too much influence in Central Asia and Russia itself.

China is interested in gas supplies to heat homes and factories, particularly as that source of energy is much cleaner than oil and coal. There is a desperate need for China to tackle its air pollution which is killing tens of thousands of its citizens and making cities highly unpleasant to live in. China is receiving gas supplies from Turkmenistan and the construction of a new pipeline to Russia will help increase its use of gas.



Categories: China - Africa, China Goes Global

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