China's global quest for oil

To feed the growing energy appetite of the world's second-largest economy, state-controlled enterprises have the mission of securing oil and gas supplies.

To feed the growing energy appetite of the world's second-largest economy, state-controlled enterprises have been given the mission of securing oil and gas supplies wherever they can be obtained, and the country is spending handsomely. Tamsin Carlisle reports When the going gets tough, China goes shopping for energy assets. Last year, Beijing sent its powerful state-controlled enterprises on a mission to scour the globe for oil and gas supplies in a bid to quench the country's growing thirst for fuel. In hard bargaining with sometimes hostile governments, the Chinese firms did not always bag their quarry, but they nonetheless racked up deals worth tens of billions of dollars in a single year, in countries as far afield as Venezuela, Canada and Iraq.

They also took advantage of asset prices that had fallen significantly in tough economic times. Unlike in most of the developed world, China's economy did not grind to a halt during the global recession, which kept upwards pressure on the country's already substantial energy requirements. "Their predicament is they have growing demand and stagnant local supply of oil. So they are looking for sources abroad," said Leo Drollas, the deputy executive director and chief economist of the Centre for Global Energy Studies in London.

Last year's foreign buying spree was not the first for the likes of China National Petroleum Corporation (CNPC), China National Offshore Oil Corporation (CNOOC) and China Petrochemicals Corporation (Sinopec), but previously the Chinese firms had mostly purchased assets in Africa and Central Asia, which typically produce oil similar to China's own crude. Oil and gas from those regions were still on Beijing's shopping list last year.

In July, CNOOC and Sinopec agreed to purchase a 20 per cent stake in a highly prospective Angolan oil block from the US oil producer Marathon Oil for US$1.3 billion (Dh4.77bn). The following month, Sinopec struck a $7.24bn deal to purchase Addax Petroleum, a Canadian company producing oil in Nigeria and Iraqi Kurdistan. In October, China agreed to invest $7bn in Guinea's oil and mining infrastructure and to double its investment in Nigeria's oil sector to $6bn. CNOOC agreed to upgrade Kenya's transport infrastructure in return for oil, although none has yet been found in that country.

In Africa, China has benefited from the goodwill of governments frustrated by previous dealings with the West. "Huge Chinese investment in African companies and infrastructure is helping Africa develop. The Chinese bring what Africa needs: investment and money for governments and companies," the Rwandan president, Paul Kagame, told reporters in October. "European and American involvement has not brought Africa forward."

But not every African government is so enamoured with Beijing. Nigeria is souring on the relationship, after China failed to deliver on pledges to develop infrastructure in exchange for oil, a recent Chatham House study suggests. Last year, Beijing failed to secure an agreement for its biggest-ever proposed African oil investment, a roughly $30bn offer to acquire 23 Nigerian oil blocks thought to contain one sixth of Nigeria's oil potential.

The Libyan government blocked CNPC's $462 million bid for Verenex Energy, a Canadian company with oil and gas discoveries in the country. Libya's National Oil Corp later bought Verenex for $299m. China's efforts to foster energy relations with Central Asian states, however, worked out well last year. Just last month, a joint venture between CNPC and the Kazakh government-owned Kazmunaigaz purchased Mangistaumunaigaz, one of Kazakhstan's largest private oil and gas exploration companies, from Central Asia Petroleum for about $3.3bn. Related to that deal, CNPC and the Export-Import Bank of China earlier agreed to lend Kazmunaigaz a total of $10bn for oil and gas development, including the construction of part of a major gas pipeline to stretch from the Caspian Sea to western China.

Beijing appeased Moscow, which might have interfered with that deal, by agreeing to provide $25bn of loans to Russia in exchange for oil. China Investment Corporation, the Chinese sovereign wealth fund, had previously bought 11 per cent of Kazmunaigaz in a $1bn deal. Beijing also turned its attention in a big way last year to the Americas. In Canada, CNPC spent $1.9bn to acquire two oil sands projects. Canadian authorities reviewed the deal and decided not to block it, to the dismay of some US officials.

"I think that an acquisition like this should raise national security questions both for the government of Canada and for the government of the United States," said Carolyn Bartholomew, the chair of the US-China Economic and Security Review Commission. In 2005, Washington had rebuffed an $18.5bn takeover offer from CNOOC for the California oil firm Unocal, leaving Unocal to be acquired by the oil major Chevron in an all-American deal. Last year, however, CNOOC returned to the US to negotiate the purchase of oil leases in the Gulf of Mexico from Norway's StatoilHydro.

Analysts suggest it might be harder this time for the government to block the potential deal. Not only is the US economy still ailing, but the country has also welcomed investment in deep Gulf of Mexico oil projects from several other big foreign energy enterprises including Spain's Repsol, France's Total, Brazil's Petrobras, Britain's BP and the Anglo-Dutch group Royal Dutch Shell. Nevertheless, US politicians who previously berated Beijing for its role in Sudanese oil development during a civil war are unlikely to overlook China's more recent involvement in the oil sectors of two other enemies, Iran and Venezuela.

All three of China's biggest state-controlled oil companies have clinched deals with Tehran to develop some of Iran's biggest oil and gasfields. Last year's crop included agreements for CNPC to develop phase 11 of the massive South Pars gasfield to develop three oilfields. In May, CNOOC signed an agreement to develop the North Pars gasfield in the Gulf as a precursor to developing Iranian gas liquefaction facilities. The company hopes to secure 10 million tonnes per year of the fuel from the project.

Last year, China extended $6bn of loans to Venezuela for the expansion of various oil projects, including financing for a $4bn joint venture between the Venezuelan national oil company and CNPC. Earlier in the year, the Chinese Development Bank lent Petrobras $10bn to help with its $170bn five-year plan to increase Brazil's crude output in exchange for oil. The difference in the US and Canadian attitudes to Chinese oil investment may reflect their contrasting energy security aspirations. As the world's biggest oil importer, the US fears Chinese competition for a key resource. Canada, as an oil exporter with only one buyer - the US - is keen to diversify its markets, and sees China as a potential new customer.

A number of other oil exporters, including some in Central Asia and the Middle East, apparently feel the same way. Thus, Iraq welcomed Chinese companies last year to its oil auctions. Its oil ministry awarded several contracts to oil development consortiums including Chinese firms. The first was a 20-year contract for BP and CNPC to triple output from the 17-billion-barrel Rumaila field. Saudi Arabia in recent years has included Chinese enterprises in the select group of foreign companies invited to explore for gas in the kingdom.

The emirates of Sharjah, Umm al Qaiwain and Ajman have awarded concessions for the development of two small Gulf oilfields to partnerships that include the Sinochem unit Atlantis Holdings. Late last month, two UAE oilfield services companies joined CNPC and South Korean firms in a consortium that won $9.71bn of contracts to develop Turkmenistan's biggest gasfield and export gas to China. For oil exporters to Asian markets, strengthening commercial ties with the world's second-biggest energy consumer makes sense. Saudi Aramco and Kuwait National Petroleum Company are in joint ventures building refineries in China.

On Thursday, Borouge, the petrochemicals joint venture between Abu Dhabi National Oil Company and the Austrian chemicals company Borealis, opened a sales and marketing subsidiary in southern China. China's oil and gas acquisitions are set to continue this year, possibly at an even faster pace. CNOOC has reopened discussions with Nigeria, sweetening its offer to as much as $50bn. A Chinese deal may be pending for the development of Ghana's big Jubilee oilfield. In Uganda, CNOOC is in talks with the government over a $5bn deal to acquire assets from the UK's Tullow Oil. In Argentina, CNPC and CNOOC may have offered $17bn for the YPF unit of Repsol.