China, Niger: Beijing's Risky Oil Deal

The China National Petroleum Corp. (CNPC) announced June 3 that it secured a $5 billion oil deal with the government of Niger on June 2. The deal calls for the development of the Agadem oil field, and probably extends CNPC control over two other oil fields in the African country. While Niger is an improbable place for a large oil project, China's need to secure oil supplies — combined with oil prices in excess of $120 per barrel — means China can take the risk in Niger. In return for the more than 14,000 square mile Agadem concession, CNPC stated it will construct an oil refinery capable of producing 20,000 barrels per day (bpd) in Zinder, Niger, and will construct a 1,240-mile-long pipeline to export crude from the Agadem field. Niger is an improbable place for an oil project on the scale of this CNPC investment. The country is not yet an oil producer, despite more than 20 years of exploration. Proven reserves at the Agadem field are only 324 million barrels, meaning production at a 50 percent recovery rate and assuming output of 100,000 bpd would run dry in five year's time, not much return on a $5 billion investment. But what might seem foolish with oil at $30 per barrel makes more sense when prices are sustained at well above $100 per barrel. For the Chinese in Niger, the Agadem deal probably is part of a larger package of other energy and commodity interests. CNPC holds exploration and operating licenses in two other oil blocks: the 27,628-square-mile Tenere block and the 23,507-square-mile Bilma block. Both of these blocks, which require CNPC to complete drilling by the end of 2008, are located next to Agadem. Drilling at these two fields still is ongoing, however, but the terms of those licenses will likely be extended as a result of the Agadem deal. In addition to energy interests, the China Nuclear International Uranium Corp. (SinoU) is developing uranium concessions in central Niger near the town of Agadez. Though CNPC aims to begin production at Agadem in three years, exporting crude out of landlocked Niger will require building a pipeline that could easily see CNPC's $5 billion investment double. The Agadem field is located in the extreme southeast of Niger, bordering Nigeria. CNPC thus could construct the pipeline to existing loading platforms in Nigeria's Niger Delta region, where China also holds energy interests. Introducing a new pipeline through Nigeria and the Niger Delta would require separate negotiations with Nigerian officials at the federal, state and local levels. It would also require negotiations with militants and activists in southern Nigeria's Niger Delta to obtain security guarantees. Failure to pay bribes to gain and maintain these approvals could result in the kind of pipeline sabotage and oil worker kidnappings that have shuttered a quarter of Nigeria's oil output since 2006. Alternatively, CNPC could avoid Nigeria by building the pipeline north across the Sahara to loading platforms in Libya or Algeria. The Sahara poses risks as well, however, given the limited security capabilities of Niger's government against the rebel Niger Movement for Justice (NMJ) — which is active in central and northern Niger — and the Maghreb branch of al Qaeda active throughout Algeria and its southern border regions with Niger and Mali. The Chinese are likely to anticipate the militant threats in Niger and Nigeria, given their experience with kidnappers from the NMJ and in the Niger Delta. This means the Chinese probably have already taken cost of protection money to the NMJ and militant groups in Nigeria into account. In spite of the financial and militant risks to the CNPC project at Agadem, China needs to secure oil supplies to supply its population and overcome fuel shortages it fears could lead to social — and thus political — instability. Combined with oil prices in excess of $120 per barrel, it is worth it to China to take the $5 billion risk in Niger. And with cash reserves likely to reach $2 trillion by the end of 2008, China has the means for resource acquisition in Niger regardless of the project’s profitability.