China’s oil and gas expansion is gathering pace and may turn the country into a global energy player. Chinese conglomerate Yantai Xinchao is looking to buy oil-producing assets of Texas for US$1 billion, while CNPC has expressed an intention to buy 19.5% of Rosneft shares for up to US$10 billion. These are just the latest news about expansion of the Chinese companies abroad. Last year, Yantai Hinchao bought two oilfields in U.S. for US$1.3 billion, adding them to the Chinese oil and gas assets in 42 countries. Actually, the total cost of China’s foreign oil and gas assets has increased to US$92 billion enabling China to compete in the oil and gas market with the leading OPEC members – Kuwait and UAE. According to the International Energy Agency (IEA), last year, foreign assets of the Chinese companies brought 3 million barrels of oil daily, which is more than 27% of China’s consumption. In addition to 4.6 million barrels of the domestic recovery, the country self-sufficiency in oil totals 65%. Experts say China’s economic expansion will turn the energy market upside down. They say the growing foreign assets of China will soon let it dictate its own conditions in the global market.
“What we do know is that China will be a major energy player for the foreseeable future,” says John Manfreda, analyst at Oilprice.com.
With no fuss
The leaderships of Chinese companies say it is impossible to satisfy China’s needs at the expense of foreign assets, as the demand is too high – the country is the second largest oil importer. They say the expansion of companies will turn them, not the country, into global players, such as, for instance, BP or ExxonMobil. To prove their words, they say that the greatest part of the oil recovered abroad is sold on the global market, and is not supplied to China. Meantime, experts say everything depends on the geographic location of the asset. Sometimes, it is more effective to buy oil and gas rather than supply them.
“Chinese companies join production projects to guarantee supply of energy resources to their own market. This is what makes them different from Western companies,” says Igor Yushkov, a leading analyst at the National Energy Security Fund. “For instance, 30% shares of Yamal, the Russian liquefied natural gas project were bought by Chinese companies: CNPC and Silk Road Fund. It was done on condition that in the summer season of navigation on the Northern Sea Route, gas will be supplied to China. As for Total, it joined the project with hope that it will be profitable. Such companies as Shell, ExxonMobil or BP join projects for profit, not for guaranteeing oil supply to the country of their origin. Meantime, the Chinese companies less care for profits. That is exactly why, Chinese companies have been operating in Africa since late 1990s and early 2000s. Western companies often preferred not to enter politically instable, less studied countries with unclear tax regimes. China, quite the contrary, entered such countries, bribed local political leaders to receive security guarantees and reduce the official tax burden.”
All for energy security: both realtors and gold retailers
One of China’s distinctive features is that the state-run companies were expanding abroad until recently. These are Sinopec, CNOOC and CNPC. All they are engaged in oil and gas recovery – ground, sea and shale. Besides, these companies participate in projects of storage, refinancing and transportation of oil and gas from U.S. and Brazil to Angola and Australia. They control the entire chain of hydrocarbons supplies; from wells up to consumers.
“China keeps diversifying its oil and gas supply sources,” says Igor Yushkov. “The Chinese are afraid of the supply interruption, which is quite possible. U.S. and its allies regularly hold exercises in the Malaki Gulf - it is the ‘bottleneck’ of the global trade, as nearly all oil tankers and LNG carriers pass through it sailing from Africa and Middle East to China. Therefore, Beijing develops, for instance, cooperation with Russia. We can supply energy resources to China without transit countries. It was for the same reason that China has entered Central Asia by building a gas pipeline from Turkmenistan.”
Experts see also an indirect cause of China’s oil and gas expansion – reduction of the country’s development rate and the search for new opportunities for the development of the companies that have never been engaged in the recovery of hydrocarbons. For instance, Yantai Xinchao that has already invested US$1.3 billion in oilfields in Texas and plans to buy more assets for US$1 billion, at the same time operating in the real estate market. Gold retailer Goldleaf Jewelry Co before acquiring Texas-based ERG Resources for US$665 million specialized in retail trade in gold only. There is a nuance here – all these are privately run companies. Beijing started issuing licenses to non-governmental companies for import of fuel in the country last year. The goal was to break the monopoly of the state-run enterprises and create more competitive and efficient market. This motivates the private companies to earn and fill the domestic market at the same time.
"There is a signal that China will open up more in the fields of both crude production and trade, and more import licenses will be given to private refineries," said Gao Jian, a senior analyst at SCI International, a commodity market information provider. "As a result, more private companies, even non-energy firms, will be encouraged to move into a slowing-down but still high-margin sector."
Experts say another reason of the oil and gas expansion of China is the situation with oil and gas recovery inside the country. The conventional oil and gas fields are running dry, though China owes the largest liquefied gas reserves and potentially large subsea fields. The problem is that the country lacks technologies – another reason why it has to buy energy assets abroad. For instance, in 2013, CNOOC bought Nexen Energy for record-breaking US$15 billion and received assets to recover non-conventional oil and gas in Canada. In addition, the state-run company has shares in two deep-water fields Stampede and Appomattox in the Gulf of Mexico and is the largest operator in the North Sea – on Buzzard and Golden Eagle oil fields.
We feared then, they fear now
Despite neighborhood and considerable oil and gas reserves, China’s expansion has little affected Russia. Besides Yamal LNG, the Chinese state-run enterprises have invested only in three Russian projects during the last decade. Rosneft and CNPC created Vostok-Energy JV LLC engaged in exploration and recovery of hydrocarbons in Irkutsk region. Sinopec received a 25% stake in Venineft LLC, the operator of The Sakhalin-3 project on oil and gas development on Sakhalin Island. The remaining projects of the Chinese companies in Russia are just projects so far.
“China would like to enter Russia’s market. However, at first, the Russian authorities feared that foreign companies, especially the Chinese ones, would buy the profitable assets,” Igor Yushkov says. “Then, when sanctions were imposed on Russia in 2014, Vladimir Putin said ‘there would be no restrictions for our Chinese friends.’ Actually, he said that Russia is ready to sell assets, including the ones in energy projects, to China (sale of a share in the Vankor field was discussed). Then, China feared that U.S. would impose sanctions on it for supporting Russia. Eventually, China has not replaced the West as a source of crediting, which has disappointed the Russian elites.”
China’s global expansion: oil and gas assets are not on the first place
The situation with Western countries is different. According to Brookings Institution, last year, China became the second largest investor (US$2.4 trillion) in foreign assets after Japan. According to Dealogic, within the first three months of the year, U.S. alone announced 170 deals with Chinese amalgamations and acquisitions for US$105 billion. For instance, they offered US$48 billion for Syngenta leading agriculture company, US$5.5 billion for General Electric, the world’s Digital Industrial Company. The oil and gas sector is not on the first place of the Chinese expansion even in the energy sector.
Talking to EADaily, Edgar Van der Meer, a senior analyst with NRG Expert in Toronto, said the Chinese producers of solar power plants are actively expanding and buying or amalgamating the European or North-American producers. In the oil and gas sector, the Chinese players are not that active, he said.
However, the West is no longer happy with the Chinese expansion. For instance, this winter, 45 American congressmen addressed a letter to the Committee on Foreign Investment in the United States (CFIUS) and demanded an inquiry into the Chinese deal for the Chicago Stock Exchange. CFIUS banned Philips to sell its U.S. division to Chinese buyers. In addition, a scandal broke out in Canada, after CNOOC bought Nexen Energy, and Prime Minister Stephen Harper said: “When we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments.” Afterwards, even the laws were amended and China could buy only not large assets, for instance, Baccalieu Energy Incorporated, which China Oil and gas Group bought for US$235 million.
Igor Yushkov sees nothing extraordinary in the U.S.-China conflict, since these countries are strategic rivals on the global arena. Barack Obama has openly said recently, “The United States, not countries like China, should write" trade rules.
They will not let China buy up everything
Experts say China will continue its oil and gas expansion abroad. However, it is still questionable if China will manage to become energy self-sufficient due to its foreign oil and gas assets.
According to Edgar Van der Meer, China strongly depends on foreign power generating sources. Coal, oil and gas are the major resources. Their recovery is not high in the country, which along with the economic growth rate and the growing demand in energy makes it import energy resources. That is why, China will become even more active abroad, the leading analyst at NRG Expert said. He believes that China will be reducing its dependence on oil and gas not only through buying assets. In his words, the Government is trying to reduce the dependence on the imported fuel through development of the renewable energy and non-energy-intensive industries, for instance, the nuclear power engineering.
All experts agree that China’s will not become a global energy player in the short run. Its independence on foreign energy resources is hardly possible either.
“First, they will not let China buy so many projects. Besides, it will not have sufficient money for that,” Igor Yushkov says. “Second, this will not settle their energy security problems either, because oil and gas are delivered through gulfs that can be closed. Third, participation in foreign projects does not negate the need to buy oil on market prices, as the petroleum prices are determined on the market. The situation will change, if China opens something special in the country and stop importing oil and gas.”
Aleksey Maslov, the head of the Department of Oriental Studies of the Higher School of Economics under the Government of the Russian Federation, says the purchase of the oil and gas assets should not be viewed separately from China’s general expansion and global tasks.
“First, Beijing is looking to secure itself against such foreign players as U.S., Saudi Arabia, and Russia,” Professor Maslov told EADaily. “Let’s remember the years 2009-2010 when the economic crisis broke out. Then China had enough financial reserves and it was then that it started its oil and gas expansion by acquiring oil producing companies and oilfields on Austria, Canada, Indonesia and Kazakhstan. At present, the list of the countries of China’s interests has been replenished with Africa and Iran, wherefrom China received nearly 13% of its total oil. The second factor is the fluctuating oil prices, which the Chinese economy depends on. The third, most important factor for China is survival. Inside the country, the economy has reached the limit and needs expansion outside the country. For instance, it needs a handover of entire economic sectors, as it happened with the agricultural sector of Africa or reduction of the dependence on the consumer markets of Europe and U.S.”
EADaily Fuel and Energy Analysis