(EnergyAsia, November 12 2014, Wednesday) — Having invested a total of US$73 billion in upstream assets over the last three years, Chinese state-owned firms now control around seven percent of global crude oil production of over 93 million b/d, said the International Energy Agency (IEA).
While the deals are driven by commercial interests, the IEA said “some quarters” have expressed concern that the Chinese government might leverage its growing oil and gas holdings to advance its foreign policy interest, influence world prices, and impinge on the supply security of other nations.
To address these concerns, the IEA, which represent the world’s 28 leading oil consumers, said it investigated Chinese state firms’ spending, and produced two reports in 2011 and this year.
The first report, “Overseas Investments by China’s National Oil Companies: Assessing the Drivers and Impacts” which quantified the size and growth of investments, found that Chinese firms had been responsible for 61% of acquisitions by all state-owned firms in 2009, and that their investments had helped boost global oil and gas supplies.
A follow-up study, “Update on Overseas Investments by China’s Oil Companies”, published this year affirmed the 2011 findings as China raised its overseas oil and gas production to a total of 2.5 million b/d.
Importantly, the IEA said its two studies “did not find cause to believe that the Chinese (firms) operate under the direct instructions of, or in close co-ordination with, the central government. Instead, the studies determined that the companies, especially the big three – China National Petroleum Corp (CNPC), parent company of PetroChina; China Petroleum & Chemical Corporation (Sinopec Group); and China National Offshore Oil Corp (CNOOC) – had benefitted from three decades of economic reforms to gain a great deal of power in relation to the government.”
China’s soaring domestic energy consumption has increased the state firms’ financial and economic impact, giving them the means to lobby for greater influence, said the IEA.
With domestic production stalled at just over 4 million b/d for the past two years, imports have risen to meet 59% of Chinese demand – which grew 3% last year and is expected to overtake that of the US in 2030.
While the firms remain primarily owned by the state, the studies found that they have carved out significant operational and investment independence from the government because of their historical associations with former ministries, said the IEA.
It found that top company officials held high ranks within the Communist Party, Chinese firms have a fragmented and decentralised governance structure while their enormous sizes and lobbying power give them an advantage over the government agencies tasked with overseeing them.
The IEA said it did not find evidence that Beijing requires the companies to ship back overseas production to China, as some critics have suggested.
Instead, it found that the firms made decisions on distributing and marketing their equity oil mainly based on commercial considerations, and the terms set by their production-sharing contract, or both.
“The IEA report (2011) disproved the common misconception that China’s national oil companies (NOCs) were acting overseas under the instruction of the Chinese government,” the 2014 study said, adding that “further research conducted for this updated publication has uncovered no evidence to suggest that the Chinese government imposes a quota on the NOCs regarding the amount of their overseas oil that they must ship to China”.
Change in investment behaviour
The latest study uncovered two important changes in Chinese investment behaviour: the companies’ new emphasis on investment in unconventional oil and gas, and a reorientation from high-risk regions to areas with more stable geopolitics.
The recalibration has come as countries in the Americas and Australia have been more welcoming of Chinese investment, while investments in other regions have had less success amid rising nationalism and political uncertainty, said the IEA.
The first significant setback for Chinese investment was in Sudan. Chinese state firms are the biggest investors in South Sudan’s oil industry, but the investment was made before the new nation came into existence as a result of separation from the old Sudan.
Sudan was among the very first countries to attract Chinese interest, with activities dating back to 1995. That involvement forced China to weather international scrutiny during the Darfur crisis, but by 2010, Chinese equity production in the country, most of whose oil fields are in the south, was 210 000 b/d.
After South Sudan’s 2011 independence, oil transport negotiations deadlocked, and by early 2012, nearly 900 Chinese-operated wells were shut or forced to reduce production. South Sudan expelled President Liu Yingcai of the Chinese-Malaysian oil consortium Petrodar for “non-cooperation”.
By the end of 2013, CNPC and Sinopec reported oil production of only 84,000 b/d in South Sudan and Sudan.
Unrest in South Sudan has not gone away, with intermittent fighting this year. But contrary to the position it adopted during the so-called Arab Spring and in Syria in particular, the Chinese government has sought to be a major mediator among the various factions.
Similarly, unrest in Iraq continues to threaten Chinese firms’ combined 472,000 b/d production entitlement – 25% of all Chinese overseas oil output. China has long viewed Iraq as a replacement for reduced flow from Iran.
Since 2007, Chinese firms have invested no less than US$14 billion in Iranian oil and gas fields. As a result, Iran became China’s third-largest oil supplier in 2010 and 2011 to account for 11% of total imports. But the effects of international sanctions dropped Iran to sixth place as of the end of 2013, just after Iraq and well behind top-ranked Saudi Arabia, which provides about half of all imports.
According to the IEA, Libya also has been a deep disappointment as the country’s growing conflict has slashed exports to China by more than one-third, to 0.8% of total imports in 2013. Beijing also had to arrange an emergency plan to evacuate 35,000 Chinese nationals from the country during the overthrow of the Gaddafi regime, and it subsequently has been involved in complex discussions concerning its pre-2011 contracts.
In Syria, Chinese companies saw their combined equity production fall from 84,000 b/d to less than 53,000 b/d in 2011. By end-2013, only Sinochem was still operating and its production came to a measly 2.5,000 b/d, said the IEA.
Security challenges have affected Chinese operations in Myanmar and Nigeria and potentially in Central Asia, where the competitive edge held from early entry is threatened by growing ethnic tensions and terrorist threats in the some of the five countries through which the Central Asia-China pipelines run. More trouble may follow, as CNPC successfully bid in 2012 to be among the first companies to explore for oil and gas in Afghanistan.
In Africa, the IEA, said Chinese firms face the risk of contract disputes in Niger and Chad.
The companies have had greater success in Russia, Saudi Arabia and Central Asian countries such as Turkmenistan and Kazakhstan, where energy deals have been combined with other investment.
Sinopec entered the refining industry in Saudi Arabia by investing US$4.5 billion in the company’s first international downstream deal. A loan-for-gas deal with Turkmenistan secured 25 billion cubic metres (bcm) of gas supply, bringing total supply capacity to 65 bcm per year.
Benefits from increased co-operation with Western firms
Increasingly, the Chinese firms are looking to invest in more stable regions as well as step up co-operation and co-ordination with independent oil companies of Western countries, said the IEA.
Every Chinese state firm has expanded its global production portfolio significantly, particularly in North America and Australia, usually through direct acquisition when possible.
The IEA estimated that last year state-owned and smaller Chinese companies invested a total US$38 billion in global upstream oil and gas mergers and acquisitions, up from US$15 billion in 2012 and US$20 billion in 2011. This shift of investment focus also has improved China’s upstream knowledge and techniques that it intends to use for domestic production.
The National Energy Administration addressed research, development and demonstration projects in 2012’s 12th Five-Year Plan for Energy Technology, which calls for domestic development of shale gas, heavy oil and other unconventional energy sources. The Ministry of Land and Resources estimates that domestic shale gas reserves exceed the US’, and expertise from state firms’ investments in foreign companies could help develop those reserves.
International majors including Shell, ConocoPhillips, ENI and Total have co-operation accords with Chinese firms to conduct seismic surveys, exploration, and joint research to develop shale gas and oil blocks in China.
But the IEA also cautioned that there are significant differences between US and Chinese reserves, which will mean a potentially challenging adaptation of North American drilling technologies to China’s geological specifications.
Commercial influences on foreign policy
The IEA’s studies addressed the concerns of other countries towards the state firms’ role in China’s expansion of oil and gas investment abroad.
Given 21 years of surging investment in countries around the world, the IEA said it was inevitable that Chinese firms would run into challenges and generate concerns.
The IE said its studies found that the companies have relied heavily on Beijing’s support in the Middle East and in Sudan and South Sudan, raising two questions: will China’s commercial interests help shape the country’s foreign policy in these regions, and to what extent does the existence of substantial energy and other commercial investments already influence China’s diplomatic decisions?
The IEA described the firms will face their greatest challenge in managing their business interests that are highly dependent on the evolution of Chinese foreign policy. For now, the firms are still charging ahead with overseas expansions and keep the pressure on both themselves and their government.
Given their growing presence and potential impact on global energy security and engagement, the IEA said it will “carefully monitor” ongoing investment by all state-owned firms around the world.
While the Chinese firms’ overseas investments may have originated as primarily commercial moves, the IEA said recent events have politicised many of them.
The IEA said it “is among many observers watching how the Chinese NOCs and their government find ways to work with each other – and other players in the global energy sector – to reconcile these political and security issues.”