The months of September and October saw a sudden surge in overseas investment activity by China’s national oil companies (NOCs). CNPC International obtained the right to 70% participation in the giant South Azadegan field in Iran, with its reported reserves of 42 billion barrels. The same company also reached agreement with Iraq’s government on the commercial terms for the development of the Rumaila oil field, in collaboration with BP. China’s already large presence in Kazakhstan was further boosted by the purchase by the sovereign wealth fund, China Investment Corporation, of an 11% stake in JSC KazMunaiGas Exploration and Production. In Canada, PetroChina bought a 60% share of two new oil-sand projects, MacKay River and Dover, at a cost of US $ 1.7 billion. CNOOC was rumoured to be reviewing large swathes of offshore acreage in Nigeria, acreage currently held by international oil companies. Finally, the China International Fund is in talks with the government of Guinea to provide billions of dollars of financing for oil, mineral and infrastructure projects.
These moves tell us little new about the motivations, determination and capacity of China’s NOCs to invest overseas, but they do serve to remind us of the range of motivations on the part of host countries to attract these Chinese investors and of the degree of domestic controversy stimulated within the host countries.
Host governments play a key role in the internationalisation of China’s oil companies, for it is they, or their national oil companies, who agree the deals and award the contracts. Though many host governments treat the Chinese companies in the same way as companies from other countries, a number of governments have their own specific objectives when seeking investment into their oil and gas sectors from China. These objectives range from the mainly economic to the largely political, and may be grouped under six headings.
First is the need to attract investment in the face of sanctions or other international constraints. Countries such as Iran, Sudan, Myanmar, Syria and Guinea urgently require foreign investment in their energy sectors, and yet US and other Western governments forbid or discourage their companies from investing there. As a result, these governments have no choice but to seek investment from countries which do not pursue the same political agenda, such as China, India, Russia and Malaysia. Of these, China has the largest oil companies with the greatest ambitions for internationalisation and the largest sources of finance, though Russia’s Gazprom is taking its first steps to become a major international gas player.
Secondly, there are those governments which are successful at attracting inward investment to their oil and gas sectors, but wish to reduce their dependence on certain outside parties. Countries such as Libya, Equatorial Guinea and Kazakhstan have clearly stated that they wish to diversify investment away from the western oil companies, and Kazakhstan and Turkmenistan want to break their historic dependence on Russia. Recent events show that Nigeria may also be taking this approach, with the possible objective of using the Chinese NOCs to increase their bargaining power with the international oil companies. In Canada too, the willingness to accept Chinese investment is driven, in part, by a desire to reduce dependence on the USA both as an investor and as a buyer of oil.
The third group of countries have resources or offer terms which are, at the time, of marginal interest to international oil companies. Chinese NOCs have access to ample funds and continue to be prepared to take on greater risks. As a result, they will make higher bids or accept less generous terms than their competitors. In recent weeks, both Iraq and Canada have benefitted from the more aggressive approach of the Chinese NOCs.
The fourth set of motivations is seen most commonly in Africa where many countries are in great need of investment both in their petroleum sectors and also in general infrastructure to accelerate their economic development. The governments of Angola, Sudan, Nigeria, Guinea and other African countries have been keen to except such assistance from China in association with the oil investments because this aid came has none of the conditions associated with aid programmes from the West and has been delivered in a very timely manner.
Fifthly, governments of the petroleum-rich countries in the Middle East and of other major oil exporters have objectives which relate to their search for security of demand and to the ambitions of their own national oil companies. These governments know that Asia, rather than the West, will be their biggest customer in the future and therefore they must build better economic and political relations with governments in the region, and with China in particular. Thus they are keen to sign long-term supply agreements and appear to be willing to allow Chinese companies to invest in their domestic petroleum sectors.
Finally, from the perspective of foreign relations, certain governments appear to take advantage of China’s interest in their resources in order to use China as a political and strategic counter-balance to the USA or to the West in general. This is the case for a number of governments in the Middle East, Latin America and Africa.
Whilst the objectives of the host country NOCs are usually broadly consistent with those of their government, the NOC is likely to have a number of specific business goals. First, the NOC may be willing to use Chinese service and construction companies on account of their relatively cheap price and on account of the work ethic with usually results in timely completion of even the toughest projects.
Second, the host NOC may lack the cash to implement its investment programme and may be keen to have a cash-rich, joint venture partner Chinese partner or indeed to receive cash loans from China’s government or NOCs. For example, in February 2009, the Chinese government agreed to lend US$ 25 billion to two of Russia’s state oil companies, Rosneft and Transneft, in return for a guarantee of supply of 300,000 barrels per day for 20 years. That same week, The China Development Bank agreed to lend Brazil’s national oil company (NOC), Petrobras, US$10 billion in return for supplying between 60,000 to 100,000 barrels per day of crude oil to Sinopec, China’s main state-owned refiner, and between 40,000 and 60,000 barrels per day to PetroChina.
Finally, the larger national oil companies of those Middle Eastern countries which lack a large domestic market are keen to integrate vertically downstream into refining, petrochemicals and retailing in a large market such as China. This strategy mirrors, to a certain extent, that of the Chinese NOCs and may help them to develop into major, internationalised companies.
These motivations, on the part of host governments and host NOCs, may not reflect the interests of the population as a whole. Rather they reflect the interests of the political and economic elite in power at the time. Chinese companies, from all sectors, have been surprised to discover that they are not always welcome, despite the capital investment and infrastructure improvements that they bring. This is not the place for a detailed analysis of local controversies stimulated by Chinese oil investment, but it is worth noting that some of the activities mentioned at the start of this column have been accompanied by expressions of dissatisfaction from groups within the host country: for example, from the Movement for the Emancipation of the Niger Delta in Nigeria, from local populations nearby an existing Chinese operation in Iraq, from environmental organisations in Canada, and in a daily newspaper in Iran. Further, even host governments themselves are unwilling to allow Chinese investors to become too dominant. For example, Chinese moves to secure new oil deals have been blocked recently in both Angola and Libya.
China’s rush to gain access to oil and gas resources may only have recently begun, but the web of motivations and controversies generated is far more complex than anything seen in the activities of the international oil companies, in the past or today.
Philip Andrews-Speed is Director of the Centre for Energy and Mineral Law and Policy at the University of Dundee, Scotland.