Jiangsu Oilfield Co., a unit of China's No. 2 oil and gas producer, China Petrochemical Corp. (Sinopec), announced April 14 that it signed a pact with Yemen's Energy Ministry to explore an area of about 770 square miles in eastern Yemen for crude oil. The $10 million project will have two phases extending over three years each, Reuters reported. The Yemen announcement is the latest in a string of aggressive oil and natural gas acquisitions led by Chinese companies China National Petroleum Corp. (CNPC) and China National Offshore Oil Co. Many of these acquisitions, such as Sinopec's in Yemen, are in riskier markets — either from a security or political perspective. One of the primary reasons is that it is easier and cheaper for Chinese companies to break into these markets. That will continue to be the case as Chinese companies strive to join the big leagues. In fact, two interrelated principles will characterize continued Chinese expansion: a lower-than-average aversion to risk, and acquisitions that further Beijing's foreign policy priorities and extend its global influence vis-à-vis the United States. Thirsty for Oil
At its core, commercial necessities are driving China's foreign expansion. China already is the world's third-largest oil consumer, and its domestic oil demand is projected to double by 2020. On the other hand, many of China's domestic oil fields are in sharp decline. As a result, the U.S. Energy Information Administration estimates Chinese oil imports will jump from 2 million bpd now to more than 8 million bpd in 2015, and Beijing expects the overall share of imports to rise to 84 percent of total consumption by 2030. Foreign acquisition is the quickest way to meet China's needs, as domestic exploration will take years to bear fruit.
Chinese national security is intimately tied to its ability to fuel economic growth and keep social tensions from erupting. As a result, energy security is a particularly sensitive issue for China, which currently counts on the Middle East for 60 percent of its imports. The buildup to war in Iraq — and fears of a potential disruption in Persian Gulf crude — demonstrated to Beijing the danger of that dependence. As China faces the prospect of having to quadruple its oil imports in the next decade, and surveys the potential for disruption in the volatile Middle East, it badly wants to gain more direct control over its imports while diversifying the sources of its crude oil. The tools for that expansion and diversification are China's three main oil companies, CNPC, CNOOC and Sinopec. Though Chinese companies are the new kids on the block, they can use the size of their home markets for leverage in securing projects. For instance, CNOOC was able to secure natural gas imports from Australia's North West Shelf project for 15 percent less than South Korea and Japan, mainly because the Chinese market for natural gas is so promising. In most cases, though, Chinese companies have been forced to be less than choosey about the projects in which they decide to invest. Despite some recent advances in places like Kazakhstan, China's oil companies still lack the financial muscle and industry reputation to compete for large projects with the ExxonMobils, ChevronTexacos, BPs and TotalFinaElfs of the world. The result is investments in somewhat less desirable projects in riskier markets that super-majors might decide to pass over. Chinese companies simply cannot afford to be as risk-averse as their more established competitors. That is not to say, however, that these projects will not be profitable, as higher political or security risks are balanced by lower costs. Nor does it mean that they won't serve China well in its twin drive to diversify its import base and expand Beijing's geopolitical influence. CNPC Now Leading the Charge
While Chinese companies are not yet in the same league as the western super-majors, they are ambitious. The chairman of CNPC said earlier this year that he aspires to model the company after ExxonMobil, with the long-term goal of having its overseas operations account for 70 percent of its total production. To that end, the company has been making major overseas acquisitions throughout Africa, Asia, Latin America and the Middle East. Though it has a long way to go, CNPC is headed in the right direction. In 2002, the company's production outside of mainland China jumped 31 percent to 430,000 bpd, or about one-fifth of the company's total production. And the company expects its overseas production to jump another 65 percent this year to more than 700,000 bpd. Some of that will come through expanded production at current overseas operations, and some through new acquisitions. At last count, CNPC is engaged in 21 overseas petroleum exploration and development projects in countries including Sudan, Venezuela, Peru, Indonesia, Canada, Thailand, Myanmar, Turkmenistan, Azerbaijan and Oman. The company also has recently picked up concessions in Sudan and Syria. CNPC domestic competitor CNOOC has the most foreign experience — having first invested overseas a decade ago — and continues to expand its foreign portfolio. To that end, the company has budgeted about $1 billion during 2003 for new exploration activity and overseas acquisitions. In addition, the company is issuing bonds to fund its expansion. CNOOC has reportedly hired Merrill Lynch and Credit Suisse First Boston to underwrite a 10-year bond issue of between $500 million to $1 billion, to be taken to the international bond market sometime this summer. Merrill Lynch underwrote a previous $500 million bond issue that the company might have used to fund various expansions into the Caspian Sea and Indonesia. Even Sinopec, China's largest refiner, is jumping into the game. In a major advance for Chinese companies, Sinopec and CNOOC last month purchased an 8.33 percent stake each in the giant North Caspian Sea Project in Kazakhstan. This could signal more foreign acquisitions from Sinopec — such as the one this month in Yemen — as it takes the initiative in supplying its own refineries with foreign oil. Chinese companies have compensated for their relative inexperience and limited track record by taking a more open, less risk-averse approach to investing as some of their western competitors. They also are more willing to work with unsavory regimes such as the one in Sudan. This has made them a good fit for picking up assets in the world's more unstable oil markets, and will continue to do so, particularly as political correctness becomes the rule of the day for oil firms operating in visible areas — Canada's withdrawal from Sudan in favor of China being a case in point. A Foreign Policy Imperative
Beijing is solidly behind the ambitions of its oil companies, and not just for the obvious reason of needing to ensure that imports are adequate to meet rapidly growing demand and to fuel economic expansion. China's political leadership recognizes that foreign investment, particularly in the oil and gas sectors, translates into geopolitical clout. With the United States now firmly implanted in Iraq, China will have a new sense of urgency to deepen its influence in other parts of the Middle East, while simultaneously decreasing its dependency on Middle Eastern oil. It also will build on its expansive influence in North and Sub-Saharan Africa
— fostered over decades of aid, trade and diplomacy — with investments in places like Egypt, Libya, Algeria, Sudan, Angola, Cameroon and Nigeria
. While Chinese companies will go head-to-head with western oil firms in many of these countries, they also will be more willing to make onshore investments — always a risky proposition in Africa. Beijing also will seek to take advantage of deteriorating relations between the United States and countries in Latin America such as Venezuela and Argentina. Investments in all of these regions should dovetail nicely with the economic necessity of seeking lower-cost projects in higher-risk areas. The Chinese investments in Yemen and Kazakhstan this year have significant geopolitical overtones, as the United States increases its footprint in Central Asia and frets over the future of Yemen. Another recent investment has even deeper geopolitical undertones: In March, CNPC signed a 25-year production-sharing agreement with state-owned Syrian Petroleum Co., in which CNPC will develop Syria's northeastern Kebibe field, which is less than 20 kilometers from Iraq's border. CNPC will make an initial investment of $3.5 million, with a future expected investment of $105 million that should raise the field's capacity from 4,500 bpd to about 10,000 bpd. China will seek and support projects — such as the proposed pipeline
connecting Russia's Angarsk oil fields to China's Daqing field — that have strong justifications from commercial, supply security and geopolitical perspectives. At the same time, Chinese companies — at the behest of their government — might particularly target countries with significant geopolitical importance to the United States, such as Syria, Iran, Yemen, Nigeria and Venezuela. Doing so immediately enhances China's influence over those states, translating into a mechanism with which Beijing will hope to constrain the United States while projecting its own power. And to the extent that countries see China as a buffer to potential U.S. aggression — limited as that currently is — or at least an alternative to total U.S. domination, the Chinese and their money will be welcomed with open arms.