This year’s dramatic drop in the price of oil once again put the world’s most important commodity in the spotlight. Oil’s lower price is deemed to be undermining Iran, ISIS and Russia while boosting western economies and serving the interests of the Saudis. But a much less observed deeper trend is that China’s demand for oil has been steadily rising to the point where it is now the world’s premier importer, overtaking the USA who has seen its own imports fall thanks to rising domestic production.
The geopolitical impact of this development is profound and has yet to be fully realised, but while China’s oil needs are huge, its energy companies in terms of overseas assets, technology and expertise remain far behind its western competitors, below I take a look at the geopolitics of China’s oil supplies and the role of China’s state owned oil companies or National Oil Companies (NOCs) who work in some of the world’s least hospitable environments.
China’s NOCs first ventured overseas in 1993 to Thailand and Peru, then to Sudan in 1995 and Angola soon after that. NOCs have continued expanding across the globe and have become ever more sophisticated their reach and operations, so by the end of 2013 their combined oil and gas production totalled 2.5 million barrels of oil per day, while this is impressive it is still a long way behind its western peers. In recent years countries like Iraq have added a great deal of production, underlying the Chinese ability to work even in the most dangerous markets. This expansion has also meant dealing with the reality of geo-politics and conflict; violence in Sudan, Iraq and Libya has found Chinese companies and staff caught in the middle of local clashes on many occasions. Chinese oil companies now have significant assets in many fragile states, which will present both commercial and foreign policy dilemmas, such as where and when it should defend these assets as they inevitably come under threat.
Mergers and Takeovers
As these firms have expanded and become cash rich they have started scouring the world for takeover targets, with the aim of gaining technical knowledge, acreage and international recognition. When CNOOC took control of Canadian firm Nexen for $15 billion it transformed the company – giving it an international profile which it lacked before and helped develop its in-house expertise. The non-interference approach of the Chinese government is also a great door opener for Chinese NOCs looking to operate in more authoritarian states, as local governments can be assured they will not be lectured by Beijing, this has led to numerous investments in states that many western firms prefer to avoid, such as Sudan and Venezuela.
Supply and Demand
China’s demand for oil is expect to reach 12 million barrels per day (mbpd) by 2018 up from 10.1 mbpd, a big increase when much of the world has seen flat or falling demand. It will also mean that it is responsible for 12% of the world’s total consumption. Today the China’s top crude oil suppliers are (in order) Saudi Arabia, Angola, Oman, Russia, Iraq, Iran, Venezuela, Kazakhstan, United Arab Emirates and Kuwait, all countries which will now have to consider events and policies in China more closely.
The Dash for Gas
Foreign gas supplies are also in big demand in China, it is much less polluting than coal – which will assist the government’s efforts to combat out of control pollution. But with domestic supplies limited and shale gas options still at a very preliminary state China has looked to Asia to fill the gap – imports from Myanmar and Central Asia, Australia is also a popular destination for gas investments with 17 % of Australia Liquid Natural Gas supplies going to China, along with a great deal of coal. For course the biggest of these deals was the recent $400 billion 30 year deal done with Russia will help keep the lights on, but all carry a political risk and heavy cost. For example the Kashgan oil project by Kazakhstan’s Caspian sea should have already boosted China’s gas supplies, taking a minority share in the project CNPC took a long term view (while private companies cannot afford the luxury of being so patient) but delays in the project have set it back a long way with a cost overrun of USD 30 billion since 2005.
Perhaps most notable has been Chinese NOCs willingness to partner with Western majors in shale oil – CNPC and Shell developed a joint research programme to look at this new source of energy as well as exploring reserves in Central China. PetroChina and ConocoPhilips are also examining the possibilities of extracting “unconventional” gas resources across China. Chinese firms will be keen to extend their knowledge, while western firms will want to gain a foothold in the Chinese market.
CNPC is probably ahead of the its peers in terms of technical expertise, but Sinopec and CNOOC are not going to let them run away with the crown, there is also recent talk of the Chinese government merging some or all of its NOCs so they can compete with the western supermajors toe to toe.
China Development Bank has been doling out the cash for much of this overseas activity, most strikingly in funding Venezuela’s socialist revolution to the tune of anywhere between 20 to 30 billion dollars – all effectively barter, oil for credit lines. While this has funded the country’s budget many fear that Venezuela could renege on the debt, but given it has the world’s deepest oil reserves it can probably afford it.
Despite advances in renewables, energy efficiency and nuclear power in China, oil and gas will remain the major sources of power for China in the foreseeable future, so we can expect that China’s oil companies will continue to expand their interests across the globe.