China’s Resource Deals
Jul 12th, 2009 | By Shuying Ke | Category: newsCame across this China Daily article, “Britain’s BP, Chinese oil firm win Iraq deals“, recently and read with interest as Iraq held its first auction of its oil fields since the US-led invasion. The sale is the first chance for major foreign companies to gain a hold on the world’s third largest oil reserves since Iraq nationalised its oil industry in 1972. MSNBC also reports that at this point, “Iraq needs the expertise of internationals that can develop its dilapidated oil and gas industry. The country lacks the oil revenues needed for reconstruction following [the] U.S.-led war… that tipped the country into chaos.”
Major oil companies such as Exxon Mobil, Shell, BP and CNPC were asked to put up a total of $2.6 billion in ’soft loans’ in return for access to Iraq’s main oil fields, which could net the companies a total of $16 billion. These oil fields hold 43 billion barrels of reserves and are responsible for 2 million out of Iraq’s 2.4 million barrels per day in output, MSNBC reports.
Given the unprecedented access to Iraq’s oil fields, the most surprising part of the article is that out of the 8 fields on offer, only the largest 17-million barrel Rumaila oil field was successfully auctioned off to the BP/CNPC alliance. However, closer reading revealed that the failed auctions were due to Iraq’s low offered fee for each extra barrel produced. For example, while Shell wanted to be paid $7.89 per extra barrel of oil produced, Iraq only offered $2. Similary, the BP/CNPC alliance wanted $3.99 per extra barrel produced, but had to accept $2.
This incident is but one in a string of resource deals completed by China in its shrewd use of the current crisis to its advantage. While countries and companies are reeling from the financial carnage, China has been making use of its superior economic status to advance its position and quench its hunger for energy.
In February this year, Russia and China signed a $25B deal that will see Beijing supplied with oil from Siberian fields in exchange for loans to Russian firms. China Development Bank will lend $15B to Russian state oil firm Rosneft, and $10B to pipeline firm Transneft. In return, Russia will supply 15 million tons – 300,000 barrels a day – of oil annually for 20 years, BBC reports.
More recent resource deals completed or to be completed by China:
Jul 10, 2009
PetroChina gets nod to buy Nippon Oil, Japan’s largest refiner. PetroChina will gain a 49% stake in the venture. The two companies agreed in May to establish a joint venture to operate the refinery with a capacity of 115,000 barrels a day.
Jul 6, 2009
China National Petroleum Corp., along with France’s Total, plans to bid for 2 heavy-oil blocks in Venezuela.
Jun 25, 2009
Sinopec, China’s second largest oil company, agreed to buy Addax Petroleum Corp, a Geneva-based oil and gas producer for $7.3 billion.
Jun 22, 2009
PetroChina (recently named one of world’s 10 most profitable companies) completes acquisition of 45.51% stake in refiner Singapore Petroleum.
There are many more, such as CNPC’s purchase of Kazakh oil company MMG, and in April, and CNPC’s purchase of Canadian oil firm Verenex to access Libyan oil. In June this year, ExxonMobil has also agreed to sell 2 million metric tons of LNG a year to PetroChina. 70% of China’s energy demand is still derived from coal, and China is already the world’s 2nd largest oil importer after the US. Also note China steel giant Ansteel’s increased stake in Australian iron ore explorer Gindalbie Metals (iron is the world’s most widely used metal) to 36.28%, making it its largest shareholder at the end of June this year. And many many more.
Just as the Baltic Dry Index is a great leading economic indicator because it deals with the precursors to production, China’s rapid and large-scale acquisition of resources is also an indicator of its imminent dominance on the world stage. Fund managers everywhere are exhorting ‘buy China’, and indeed China’s rise presents great investment opportunities for us.
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