February 23rd, 2006:

What have we learned this year? That $50 oil is a thing of the past. These stocks will thrive as crude prices stay high.
By Jim Jubak
The first two months of 2006 should end any dreams that oil will drop below $50 anytime soon. They make a good case that the new price range for oil is between $55 and $70 a barrel.
Investors now know that fears of a confrontation with a heavily armed and militant Iran — the No. 4 exporter of crude oil in the world — is enough to push oil to the $69.20 it hit on Jan. 23. And that relative global “peace,” combined with oil inventories running well above average for this time of year, is enough to send oil prices down to $55.
Short of a major global economic slowdown, $50-a-barrel oil just isn't in the cards. Not in a world where fears of a future nuclear Armageddon are closely followed by news that Nigerian militias have taken oil workers hostage and forced Royal Dutch Shell (RDS, news, msgs) to cut its production there by 455,000 barrels a day.See the news
that affects your stocks.
There may indeed be, as the oil bears argue, a risk premium of about $10 a barrel in the current price of oil. In a world at peace, speculators and traders wouldn't be able to use fears of a supply disruption to drive oil prices so high. But those who believe oil prices should be lower keep getting slapped around by the world as it is. The risk premium in oil looks very, very permanent.
And that's important to investors because so many analysts on Wall Street are still using $45-a-barrel oil — or less — when they set their target prices for oil stocks. Take Citigroup Global Markets as an example: Even though the investment bank recently raised its forecasts for oil prices in 2006 to $60, Citi is still using $45-a-barrel oil to set its price targets for oil stocks.
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Investors who remember the early stages of the rally in oil stocks know that these stocks moved higher as analysts abandoned price targets based on $20- or $25-a-barrel oil and gradually came to admit that oil prices might be permanently above $30 and then $40 a barrel.
I think we've got one more round of that process ahead of us before oil stocks are fully priced. (Please remember that my picks for my appearance on CNBC are for a six-month time horizon. One thing that will sink oil prices is a slowdown in economic growth and some economists are looking for just that in the second half of 2006. If that happens, you certainly don't want to be holding a big position in energy stocks. But I think we'll get a nice rebound in growth in the first quarter of 2006, which would be good for the stocks.) The longer that the price of oil refuses to drop below $55 a barrel, the more likely Wall Street is to finally admit that the risk premium in oil is here to stay and to gradually move target prices for these stocks higher.
Cheap, safe and sour
That process will help all stocks in the energy sector — but it will help some more than others. The big beneficiaries of this process are oil producers that are adding big, low-cost deposits of oil to their proven reserves, that have concentrated their production in the securer parts of an insecure world, and that specialize in types of oil that will see the most price leverage from any scares about supply disruption.
In my Wednesday, Feb. 22, appearance on CNBC's “Morning Call” I recommended these three oil stocks that fit that profile:
Berry Petroleum (BRY, news, msgs). Last time Nigeria held a presidential election, an uprising among the Ijaw majority in the oil-rich Niger delta forced a 40% drop in Nigeria's oil production. The same pattern seems to be playing out this year as the country gets ready for elections in 2007. And with violence breaking out in the Muslim-dominated north of the country, the Nigerian army is so over-stretched that it can't provide effective security to international oil companies. Shell, the biggest producer in Nigeria, has already ordered the evacuation of workers from the most isolated parts of the delta. read more

By Funmi Komolafe, Omoh Gabriel, Kingsley Omonobi & Victor Ahiuma-Young
Posted to the Web: Thursday, February 23, 2006
ABUJA— THERE were strong indications in Abuja yesterday that the nine foreign oil workers kidnapped by Ijaw militants may be released in the next 24 hours following Federal Government’s agreement not to carry out any military attack or arrest the kingpins and their foot-soldiers whenever the hostages are released.
The Federal Government is already losing a total of $27.3 million per day to the activities of militants youths in the Niger Delta. From Shell Petroleum Development Company alone, government may have lost a total of $819 million in revenue from oil export as a result of the decision of Shell to shut in a total of 455,000 barrel of crude oil export per day for the month of January alone even as it has evacuated all its 600 workers in its Western division
Reliable security sources told Vanguard that the militants are also basing their commitment to release the hostages on the grounds that a trusted ally of theirs whose identity should be protected is allowed to come for the hostages.
In addition, the hostage takers want the government to guarantee that there will be no reprisal of any sort on them since they kept their promise of not harming the hostages.
Already, President Olusegun Obasanjo who is said to be monitoring the situation closely, is said to have told the Military High Command to create the atmosphere of non-confrontation around the creeks where the hostages are suspected to be held up.
According to the source, “we have reasons to believe that the hostages are so frightened that one or two of them may have fallen ill and the militants knowing the implications of anything happening to them would not want to incur the wrath of the Nigerian government as well as the international community.
FG loses $27.3m

Given an average oil price of $60 per barrel, the country is losing an average of $27.3 million from non export of crude by Shell. In a week, the country would have lost a total of $191.1 million while in a month, the loss would rise to $819 million if the crisis is allowed to linger.
Nigeria, a developing country with a myriad of social economic problem, needs every cent it can earn for developmental purposes. Shell on Tuesday said it had extended force majeure on Nigerian exports from the EA and Forcados fields after a string of militants attacks at the weekend. Forcados and EA off takes have been extended as of today.
Shell declared force majeure on liftings in January after a wave of militants’ attacks but extended it Tuesday after another string of attacks on its facilities at the weekend. The company, which pumps over 40 per cent of Nigeria’s oil, has shut in a total of 455,000 barrels per day as a precaution after militants at the weekend bombed the Forcados terminal, sabotaged two pipelines and kidnapped nine foreign oil workers. The militants snatched the nine oil workers—three Americans, two Egyptians, two Thais, one Filipino, one Briton—from a barge operated by US services company, Willbros, that was working on a Shell project off Forcados.
President Obasanjo, fearing that more attacks against the oil industry will force oil giants to pull out from the winding creeks of the Niger Delta thus leading to greater loss of revenue for the country, has ruled out military action to free the hostages. According to President Obasanjo, “we believe that very, very soon we should be able to reach the hostage takers. We’ve put in place a very powerful committee,” said Abel Oshevire, a spokesman for the Delta State government.
The panel is chaired by Chief Edwin Clark and will seek to contact the Ijaw youths who are holding the oil workers. The Niger Delta militants, in statements to the media, have said the men will not be released, and attacks on oil facilities will not stop until Shell pays $1.5 billion in compensation to polluted Ijaw communities.
On the international oil market scene, European oil refiners were taking the latest disruption to Nigerian crude exports in their stride because of ample supply, despite delays of more than two weeks in Forcados loadings, traders said Monday. Royal Dutch Shell was forced to shut in production feeding Nigeria’s Forcados export terminal and its 115,000 EA oilfield after militants bombed the terminal and sabotaged two pipelines.
Nigerian oil output was reduced last month after armed gunmen kidnapped four oil workers from the offshore EA field. Buyers since then have been looking for replacement barrels. “Refineries have already started working to solve the shortage because the problem started on January11,” a trader said Last month, Shell told traders that loadings of Forcados in the second half of February would be pushed into March, according to market sources.
For example, cargoes loading February 19-20 would load March 6-7, and those loading February 17-18 will load March 2-3. It was too early to say whether the rescheduled February loadings will be delayed further as a result of the latest disruption to supply.
In the meantime, refiners have taken measures to substitute the gaps in their supply of Nigerian crude. “There is lots of crude out there besides Forcados,” a trader said.
NLC appeals for hostages’ release
Meanwhile, the Nigeria Labour Congress (NLC) has appealed to militants holding the oil workers hostage to release them and ensure that no harm is done to the workers even as it acknowledged the political marginalisation of the Niger-Delta people.
In a statement in Abuja yesterday, the NLC president, Mr Adams Oshiomhole said: “The Nigeria Labour Congress (NLC) wishes to once again passionately appeal for the release of the nine oil workers being held in captivity since last Saturday. We strongly appeal that no harm be done to these workers.
“Oil workers, irrespective of their nationalities, are not responsible for the situation in the Niger Delta or for the immediate grievances being canvassed by our compatriots.
The NLC added that it “recognises that the political marginalisation and colossal injustices suffered by our compatriots in the Niger Delta area are real, legitimate and required to be redressed urgently.”
On efforts by the Federal Government, the NLC said: “While we endorse the strategy of negotiation adopted by the Federal Government, it bears emphasis that redressing the injustices requires fundamental political, welfarist and constitutional solution.” read more

By THE ASSOCIATED PRESS
WARRI, Nigeria (AP) — Militants holding nine foreign hostages said Wednesday they have no plans to release their captives soon and accused Nigeria's government of wasting time in securing their freedom.
The oil workers, who include three Americans, two Egyptians, two Thais, one Briton and one Filipino, were seized Saturday by militants belonging to the Movement for the Emancipation of the Niger Delta.
The militants, who are pressing for the release of two of the region's leaders from prison and greater control of oil revenues, accused the Nigerian government of a ''time-wasting venture'' in searching for a high-level negotiation team.
''We have no immediate intention of setting these guys free,'' a spokesperson for the group said in an e-mail to The Associated Press.
Government officials weren't immediately available for comment.
Recent attacks by the militant group on oil facilities in the West African nation — the United States' fifth-largest oil supplier — has cut production by nearly 20 percent and sent prices soaring on international markets.
The militants say they plan to widen their campaign across the vast region of swamps and creeks in southeastern Nigeria, where people remain deeply impoverished despite the great oil riches being pumped from beneath them.
Nigeria is reeling from weekend attacks in which the militants blasted oil and gas pipelines and sabotaged a key oil loading terminal belonging to Shell. That and an earlier attack has forced the company to halt the flow of about 455,000 barrels a day — about one-fifth of daily output.
Hostage takings are also a common occurrence in the volatile delta, but most are released unharmed. Last month, the militants held four foreigners for 19 days before releasing them unscathed.
Nigeria is Africa's leading oil exporter, usually exporting 2.5 million barrels daily. read more

By REUTERS
Published: February 22, 2006
Filed at 3:23 p.m. ET
NEW YORK (Reuters) – U.S. crude oil futures ended sharply lower for the first time in four sessions on Wednesday as analysts predicted a further increase in already ample petroleum stockpiles in the United States.
Crude for April delivery (CLJ6), the new front-month contract, settled down $1.73, or 2.8 percent, at $61.01 per barrel on the New York Mercantile Exchange. It fell as low as $60.52.
Traders said sell stops were triggered in late trading, but a bout of short covering near the close pared losses.
“The markets are bracing for Thursday's DOE reports, with traders cringing since the recent (supply) trends have been bearish,'' said Tim Evans, senior analyst at IFR Energy Services.
March gasoline (HUH6) settled 0.12 cent off at $1.4745 a gallon, recovering much of its losses after falling to the session low of $1.434.
March heating oil (HOH5) ended down 1.43 cents, or 0.9 percent, at $1.6521 a gallon, also cutting losses after dropping to the day's low of $1.64.
In London, April Brent crude (LCOJ6) settled down $1.16, or 1.9 percent, at $60.44 a barrel.
In an expanded Reuters survey, 13 analysts on average estimated that U.S. crude oil and gasoline supplies each rose last week by 1.1 million barrels.
Distillate inventories, which include heating oil, were forecast to drop by 1 million barrels, the poll showed.
The U.S. Energy Information Administration will release its official data for the week ended February 17 on Thursday morning, a day later than usual due to Monday's Presidents Day holiday.
NYMEX crude soared $1.45 on Tuesday after militant attacks shut in a fifth of Nigeria's crude supply.

Royal Dutch Shell shut 455,000 barrels per day of output and evacuated hundreds of staff from Nigerian oil fields due to the violence in the oil-producing delta of the African nation, a member of the Organization of Petroleum Exporting Countries.
The rebels, who also hold nine foreign workers captive, said on Tuesday they would continue their attacks and take more hostages.
Ships began moving again along the Houston Ship Channel at noon Wednesday, after dense fog dissipated, according to the U.S. Coast Guard.
A two-day halt of vessel traffic along the channel had not affected production at several refineries along the busiest U.S petrochemical waterway, refiners said.
TECHNICALS
Technical support is seen next at $60 for front-month NYMEX April crude. Last week, the contract hit a low of $59.20.
Support for gasoline was pegged at $1.40, with resistance at $1.60.
Heating oil support lies at $1.60, with resistance at $1.70, technical analysts said.
The forward curve for crude remains in contango, with September crude trading at $65 per barrel. read more

Feb 23, 2006
SINGAPORE (AFX) – Oil prices continued lower in Asian trading hours, as expectations of a buildup in US crude and gasoline stockpiles offset concerns about supply disruptions in Nigeria, dealers said.
At 11.00 am (0300 GMT) here, New York's main contract, light sweet crude for delivery in April, was down 0.26 usd at 60.75 usd a barrel from its close of 61.01 usd in the US overnight.
“The big thing is the inventory report,” said Tony Nunan, Tokyo-based manager for energy risk management with Mitsubishi Corp. “Everybody is predicting builds in crude and gasoline.”
The US Department of Energy publishes its weekly inventory data on today, a day later than usual, owing to a public holiday in the US on Monday.
Analysts expect stockpiles of US crude to have risen 700,000 barrels, with gasoline up 800,000 barrels and distillates, which include heating fuel, down 1.4 mln barrels.
The US is the world's biggest energy consumer and its energy inventories are closely monitored by the market.
The fall in crude prices also came despite renewed jitters over supply disruption in Nigeria, Africa's biggest oil exporter.
Jason Schenker at Wachovia Securities said: “The market might have overpriced the Nigerian disruption potential.”
He added that there is “a well-supplied market, especially on gasoline” that is likely to be confirmed by the US report on oil inventories.
“The expectation for inventory data,” he said, “is that you will get a buildup of crude and a buildup of gasoline.”
Attacks by Nigerian militants over the weekend on Shell's Forcados oil terminal forced the firm to cut production by 455,000 barrels per day (bpd), equivalent to almost 20 pct of the country's output.
Nigeria, the world's sixth-biggest exporter of oil, produces light, sweet crude, which is easier and cheaper to refine than the heavy, sour crude produced by Saudi Arabia.
“The geopolitical tensions are still there, but the market is getting desensitized to it,” said Nunan.
He added that as long as the situation in the US remains okay, “people will feel that we can get through this thing.”
The market was also keeping an eye on Iran, with analysts saying that tensions over that country's nuclear program could lead to disruption of its oil exports.
Russia has said it hopes to persuade Tehran to create a joint enterprise that will enrich uranium for Iran on Russian territory, enabling Iran to restore a moratorium on enriching uranium at home.
However, Russian President Vladimir Putin said yesterday that his country's talks with Iran were not progressing “easily”.
Iran exports 2.6 million bpd and is the second biggest producer in OPEC after Saudi Arabia.
str/mba/bmm/jm
null read more

Martyn Wingrove
Feb 23, 2006
Tankers
NIGERIAN oil export problems could knock back otherwise strong tanker markets if lower output continues in the medium term.
Royal Dutch Shell has shut in 455,000 barrels of oil per day of production and exports after militant attacks damaged tanker loading facilities. The Anglo-Dutch oil major also extended force majeure on exports from the Forcados and EA terminals, leaving tankers idle without cargoes. Brokers fear a a long period of downtime at these terminals or any attacks on other export facilities could force shipowners to move their tankers around Africa to the lucrative Middle East.
'How long the Nigerian situation lasts will determine how rates in the Atlantic and Middle East markets are affected,' said a London-based broker.
'The Middle East market is looking healthy and owners don't want to see tankers cruising around the Cape [of Good Hope] to swell the market.'
The market is motoring along nicely for owners and would turn back in favour of charterers if more tonnage becomes available.
This week, charter rates for very large crude carriers have remained firm despite quiet fixture activity.
Brokers said rates for VLCCs taking Middle East crude to Japan were around W115 and those making tracks to Singapore are being fixed for W130.
Brokers reported that South Korean refiners booked NYK's 1994-built, 264,457 dwt Takayama at a rate of W117.5 to carry a Middle East crude cargo.
'The market is not terribly busy, although reasonably good, but more ships competing in the Middle East market could drive rates down,' the London broker said.
Oil companies are booking VLCCs at rates of around W115 to take Middle East crude to the US, but most of the fixtures have been for voyages across the Indian Ocean.
Rates to the US west coast are about W142.5 as shown by BP booking 2002-built, 308,875 dwt Front Falcon at this rate, although this fixture was seen to be at a premium by brokers. read more

Feb 23, 2006
Crude oil prices slipped Thursday as expectations of higher U.S. oil inventories calmed a market that has been rattled recently by supply disruptions in Nigeria and Iran's nuclear program.
Light sweet crude for April delivery fell 27 cents to US$60.74 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell more than a US$1 Wednesday to settle at $61.01 a barrel.
Prices fell amid expectations that weekly U.S. oil inventory data, to be released Thursday, will show crude and gasoline stocks grew but distillate fell. The report was to be released a day later than usual because of the Presidents Day holiday in the U.S. this week.
But some analysts said the concerns about Iran and Nigeria would continue to support prices.
“People are looking at the inventory data,” said Tetsu Emori chief commodities strategist at Mitsui Bussan Futures in Tokyo. “But once actual figures are announced, the price may rebound. The market is more focused on political risk like Nigeria and Iran in the medium and longer term.”
Oil prices spiked earlier this week on news that militants in Nigeria attacked a Royal Dutch Shell PLC-operated pipeline switching station on Monday and a boat they claimed housed Nigerian military personnel. That, and an earlier attack, has forced Shell to halt the flow of about 455,000 barrels a day.
Light, sweet Nigerian crude is in high demand, especially in the United States, making the latest supply disruptions all the more important, traders said.
The Nigerian militants, who are pressing for the release of two of the region's leaders from prison and greater control of oil revenues, have threatened to fire rockets at any ships transporting crude oil from Nigeria.
Nigeria is Africa's leading oil exporter and the United States' fifth-largest supplier, usually exporting 2.5 million barrels daily. Recent attacks on oil facilities by a militant group have cut production there by nearly 20 percent.
Meanwhile, traders remained somewhat concerned about Iran, OPEC's No. 2 producer, after Iran and Russia completed the two days of inconclusive talks Tuesday on Russia's offer to enrich uranium for Tehran to avert suspicions that Iran could divert the nuclear fuel for atomic weapons. That comes amid Western pressure to impose sanctions against Iran.
Nymex gasoline futures were down 0.2 cent to US$1.4745 per gallon, while heating oil futures dipped 0.31 cent to $1.6490 a gallon. Natural gas futures declined 6.3 cents to $7.220 per 1,000 cubic feet. read more

Feb 23, 2006
Ann O'Loughlin
MEATH County Council has brought a 5m action for damages against Irish Shell Ltd.
The case arises from the leakage of petrol and diesel hydrocarbons from a Shell filling station to the adjoining site of the council's new civic offices at Trim.
The council wants up to 5m damages, plus legal costs, for the costs it's incurred through a continuing failure to build the civic offices.
It also wants the High Court to order Shell to clean up the Trim site to an acceptable level.
Pat Butler, SC, for the council, told the court Shell had accepted responsibility for the cost of cleaning up the site arising from the contamination, which was detected in January 2001 after a “sheen” from petrol hydrocarbons was observed in the nearby River Boyne.
The site had still not been cleaned to a standard which was agreed between the sides, Mr Butler said.
Shell had tried to renegotiate the clean-up standards but the Environmental Protection Agency had held there was no reason to alter those standards.
Mr Butler said Shell was also refusing to accept responsibility for the costs incurred by the council.
Solicitors for Shell had said that, as a “responsible” body, it would, if found liable for the contamination, act appropriately, counsel said. read more

By FT correspondents
Some see it as a late-blossoming relationship, others as a new kind of colonialism. Either way, China is resolutely and rapidly extending its presence and influence across the African continent as its companies move into terrain where western businesses hesitate to tread.
The Chinese advance – government-backed, led by state-run corporations and propelled by the drive to secure oil supplies – has in the span of a few years changed the pattern of Africa’s investment and trade. A secondary player on the continent until recently, China is establishing a position as Africa’s top commercial partner behind the US and France, overtaking Britain.
For China, Africa offers an extra dimension: a continent three times its own size, less populated than itself and stocked with many of the raw materials it needs. Crude oil from Angola, platinum from Zimbabwe, copper from Zambia, tropical timber from Congo-Brazzaville, iron ore from South Africa: all are on China’s shopping list.
In return, the Chinese offer advantages to African governments. They bring first-hand experience of fast development, are attuned to conditions in poor countries and are unconcerned by scruples over governance standards or human rights. In a different way to the ideological competition that took place in Africa during the cold war, China is emerging strongly as an alternative option for governments more used to dealing with former European colonial powers and the US.
At one level China is involved in a straightforward resources grab, sinking billions of dollars into promising oil zones. But it is also engaged in a mix of influence-building and opportunism. Like Africa’s former colonisers, it cements its political and trade relations with aid, special concessions, debt relief, scholarships, training and the provision of specialists. It has recently sent peacekeepers and – perhaps more surprisingly – election observers. At the same time, again like Africa’s chief western partners, it has been ready to back its commitments with military assistance and arms, providing equipment to countries such as Zimbabwe and Sudan where other suppliers are barred by embargoes.
In post-civil war Angola, Chinese contractors are rebuilding the legendary Benguela railway, originally completed by a British company in the 1920s, between the mineral-rich heart of Africa and the Atlantic coast. In Uganda a Chinese company is transforming Entebbe’s decaying State House into a ceremonial complex for next year’s Commonwealth summit.
Trade between China and Africa has almost quadrupled since the start of this decade, jumping 36 per cent last year to $39.7bn ($22.8bn, €33.4bn), according to official Chinese figures. About half of China’s exports are machinery, electronic and high- technology products. Tens of thousands of Chinese have moved to Africa, including labourers in countries such as Ethiopia or Botswana as well as engineers, traders and small businessmen. One study found the number of Chinese registered in Sudan had tripled since the late 1990s to almost 24,000 in 2004. Chinese tourism to Africa has boomed, with official numbers doubling last year to 110,000.
According to the Beijing government, more than 600 Chinese-funded companies have been set up in Africa in the last 10 years. These include manufacturing operations aimed at regional markets or possibly exports to the European Union or the US, exploiting the duty-free access granted to products from poorer African countries.
China’s search for African political allies goes back to the 1960s and 1970s, when it competed for favour with the both the west and the Soviet Union – building stadiums, ministries and, most spectacularly, 1,850km of railway from central Zambia to the Tanzanian port of Dar es Salaam, a project that western partners had turned down. Some African countries transferred their allegiance to Taiwan during the 1990s as Beijing and Taipei vied to buy their support. But today all but six of Africa’s 53 nations – Burkina Faso, Chad, Gambia, Malawi, São Tomé and Principe, and Swaziland – maintain relations with Beijing. Senegal was the latest to switch back last year.
Li Zhaozing, China’s foreign minister, made a high-profile visit to six African countries last month. The trip, which took in Nigeria and Libya, two leading energy producers, also sent a signal to smaller countries about the technical and financial aid they could expect in return for co-operation.
China’s policy nowadays is subordinated to economic objectives, with core interests in not only oil and strategic metals but also food resources. As latecomers, Chinese companies have been willing to take risks that other investors have shunned and enter countries where others have held back. In Sierra Leone they have quietly filled a vacuum in sectors from hotels to building materials, while the Chinese government has bolstered the navy by donating a fisheries patrol vessel.
A Chinese government policy document last month pledged easier market access for African commodities, duty-free treatment for some products and further encouragement for Chinese investment, backed by preferential loans and buyer credits. It set out a broad front of co-operation embracing agriculture, transport, tourism and defence as well as natural resources. While a US energy department study this month found China’s purchases of overseas assets to be economically neutral for the US, it pointed to potential problems arising from China’s readiness to deal with despotic regimes.
The clearest example of China’s energy quest clashing with western policies is Sudan, an emerging oil producer in which China is the leading investor and dominant client. China has consistently used its veto in the United Nations Security Council to block US-led efforts to impose sanctions on Sudan over atrocities committed in Darfur.
A Sudanese official describes China’s presence as important “not only on an economic level but also on a political level”. Since entering Sudan’s oil business China has stepped up sales of arms including fighter aircraft. The manufacture in Sudan of Chinese weapons and ammunition complicates the enforcement of a UN embargo on supplies to militias in Darfur. Chinese-designed arms and radios are reported to have been used across the border in Chad – where France keeps a garrison – by rebels alleged to be operating with Sudanese support.
In war-ruined Angola, the Chinese have leapt into one of the world’s most inhospitable investment environments, offering a $2bn oil-backed credit at a time when western banks and international institutions have been cautious about lending. An agreement between Angola and the International Monetary Fund has been held up, largely because of IMF concerns about how the government manages its oil money. Similar misgivings have prevented the holding of an international donors’ conference. “The Chinese are offering the loan as an alternative to working with the IMF,” says Princeton Lyman, director of Africa policy studies at the Council on Foreign Relations in Washington.
Up to now, the African view of China’s fast-growing involvement has been overwhelmingly positive. China is widely regarded as a model of modernisation, more responsive to African needs than western partners, able to build dams, roads and bridges more quickly and cheaply and providing consumer products better suited to African pockets. Although Africa’s non-oil countries have suffered from higher import costs, the continent is also benefiting from the rise in commodity prices driven by Chinese demand.
But criticism is growing. Trades­people from Cape Verde to Namibia complain about a Chinese invasion. In Lagos, West Africa’s main commercial hub, Nigerian authorities have been ejecting unlicensed Chinese market traders. Companies from China are censured for preferring Chinese labour or, when they employ locals, providing poor conditions. China’s cheap consumer goods displace local production.
Garment factories have been shutting across Africa, with devastating effect in countries such as Lesotho, where some were Chinese-owned. There is a clamour for protection. When South Africa’s Cosatu labour federation staged an anniversary celebration in December, participants peeled off their red union T-shirts in disgust when word went round that they were Chinese-made.
“There’s no altruistic relationship between China and Africa,” says Lyal White of the South African Institute of International Affairs. China’s interest is not in the high-value manufactured goods South Africa wants to promote. “Africa is a treasure trove of raw materials and that’s what China needs.”
Chris Alden, an expert at the London School of Economics, says of the relationship: “African actors are beginning to see this as a mixed blessing.” While in some countries China’s involvement appears benign, in others its approach undercuts efforts by the African Union and western partners to make government and business more transparent and accountable. Chinese co-operation provides a lifeline to countries such as Togo, largely cut off from European aid, and comfort to pariah regimes.
Avisit to Beijing in November by Jendayi Frazer, US assistant secretary of state for African affairs, marked only a first step in interaction with China over Africa. China does not provide figures for development aid, has declared no arms sales to the UN register since 1996 and its technological assistance has raised questions about its motives. For a satellite to be launched next year, Nigeria has turned to Great Wall Industry Corporation, a Chinese company against which the US has applied sanctions for allegedly supplying Iran with technology that could be useful for a nuclear weapons programme.
A senior Nigerian foreign affairs official says: “The perception is that China is catching up with the level of engagement that western governments have?.?.?.?Being a developing country, they understand us better. They are also prepared to put more on the table. For instance, the western world is never prepared to transfer technology – but the Chinese do. It is our view that, while China’s technology may not be as sophisticated as some western governments, it is better to have Chinese technology than none at all.”
Money flows to oil
In less than 10 years China has secured oil production and exploration deals in a swathe of countries reaching across Africa from the Red Sea to the Gulf of Guinea.
Its rapid emergence in African oil reflects the explosive growth of its energy needs and its desire – in common with the US – to find sources outside the Middle East. China relies on Africa for between one-quarter and one-third of its oil imports. “It’s the same as US policies [on oil],” says Li Zhibiao, a researcher at the Chinese Academy of Social Sciences, a state think-tank. “China wants to have diversified channels in case of disruptions.”
Its first big foray came in late 1996 when state-owned China National Petroleum Corporation took a 40 per cent stake in concession blocks in Sudan originally held by Chevron of the US. The Chinese co-built a 1,500km pipeline from the oilfields to Port Sudan, and a refinery near Khartoum. China now takes half or more of Sudan’s oil exports, while western oil majors have kept their distance. US oil companies are barred from doing business there.
Remaining Canadian, Swedish and Austrian interests were almost all sold in 2002 and 2003 after pressure from church and human rights groups over the role of oil in fuelling the long war in southern Sudan. More recently, China has invested heavily in larger African oil exporters. In Angola, China National Petrochemical Corporation (Sinopec) bought into a BP-operated offshore block in 2004, securing its entry with a $2bn credit line to rebuild the country’s infrastructure. It has tied up with Angola’s Sonangol to run another block, previously run by Total. China is already Angola’s second customer for oil after the US.
In Nigeria, Africa’s biggest producer, the state-controlled China National Offshore Oil Corporation is to pay $2.3bn for a 45 per share of output from an offshore block. CNPC is in talks over a Nigerian refinery in an effort to win preferential treatment in oil block allocations.
CNPC also has exploration deals with Algeria and Niger and a stake in exploration in Chad, a country that officially deals with Taiwan rather than China. Sinopec has signed an evaluation contract in Gabon, where activities headed by Shell and Total have dwindled. In Equatorial Guinea, where US groups dominate a surging oil business, China is said to be providing military training and specialists in the hope of gaining oil concessions. Teodoro Obiang Nguema, that country’s dictator, describes China as its main development partner.
Mugabe gets shelter
Zimbabwe, according to president Robert Mugabe, is “returning to the days when our greatest friends were the Chinese”. On independence day last year he told supporters: “We look again to the East, where the sun rises, and no longer to the West, where it sets.”
Mr Mugabe’s ties with China date from the pre-1980 struggle against white minority rule, when the Soviet Union backed the rival Zapu movement and his Zanu relied on Chinese support. The relationship has flourished anew. Mr Mugabe is no longer welcomed in Europe or the US but is still fêted in China.
Last year China became Zimbabwe’s largest supplier after South Africa, shooting up from 11th place in just three years. Businesspeople believe the figures may be understated because of the large volume of Chinese goods – disparagingly referred to as “zhing zhong” – smuggled in or re-exported from neighbouring countries.
Zimbabwe’s pro-government media tout China as the main target market for tourists, the main source of inward investment, the most likely foreign partner to help finance the government’s plans and the single most important source of defence equipment. The state investment agency talks of proposed Chinese investment of more than $1bn. But it is hard to separate fact from government efforts to convince Zimbabweans that an economic boom is about to materialise.
Reports of Chinese plans include a joint coal venture, a glass factory, a ferrochrome smelting plant, telephone assembly and beef production on vast tracts of acquired land. China’s ambassador recently told some western counterparts that none of the seven co-operation agreements signed a year ago had yet been activated. But there is no doubt about China’s interest in Zimbabwean tobacco and platinum and other mineral reserves, which are mostly controlled by South African or British companies.
China was reported in 2004 to have agreed to sell Zimbabwe FC-1 multi-role fighters as replacements for its F-7s, the Chinese version of the Russian MiG-21. Defence sales are also said to include equipment to enable intelligence services to spy on internet and e-mail traffic. Struggling Air Zimbabwe has meanwhile received three Chinese MA-60 aircraft, on a buy-two-get-one-free basis.
Defending himself against charges of extravagance in building a mansion in Harare, Mr Mugabe retorted: “Of course it is lavish: the Chinese are doing the roofing. They are our good friends, you see.”
Reporting by David White, with Andrew England, Tony Hawkins, Dino Mahtani, John Reed and Andrew Yeh read more

Titans Acquire Minority Stakes
With Little Control of Their Own;
Will the Strategy Prove Wise?
By KATE LINEBAUGH
February 23, 2006
The world's banking titans, including Bank of America Corp., Royal Bank of Scotland PLC and Merrill Lynch & Co., have spent billions of dollars buying small stakes in China's biggest lenders. So far, they are looking pretty smart.
When Bank of America took a 9% stake in China Construction Bank Corp. last June, the North Carolina lender agreed to pay $3 billion. That stake is valued at about $9.2 billion, following a surge in the shares after the bank's initial public offering of stock in October. HSBC Holdings PLC's 19.9% interest in China's fifth-largest lender, Bank of Communications Co., is valued at more than $5 billion, more than double what the British bank invested. Shares in both Chinese banks have soared about 40% so far this year.
Those numbers help explain foreign investors' decision to put down a lot of money with not a lot of say in how their investments are managed. The investors have minimal influence over the operations of their Chinese partners, and so far they have received few of the benefits they anticipated, such as credit-card joint ventures. They are barred from holding more than 25% of a Chinese lender.
For a major Western bank, though, it remains an open question whether taking a minority stake with little control makes for a good China strategy. The returns can be huge, but there is no assurance that the investors' highflying stakes won't decline before their three-year lockup expires — or that China will succeed in turning its banks into institutions that the foreigners will be glad to be part of.
Low prices have increased the temptation for foreign bankers to buy into the financial system of one of the world's fastest-growing major economies. As a result, they will be well-positioned if China eases foreign-investment limits. “The growth potential is huge,” says Chi Lo, an economist in Hong Kong and author of several books on China. “That is why everyone is trying to get in and get a slice of it.”
As more of China's banks go public, their pre-IPO investors are hoping for gains. Bank of China, the country's second-largest bank by assets, is looking to raise about $6 billion in an initial public offering in the first half of the year, when the likes of RBS, Merrill Lynch and others may see the value of their investments increase. They say they are in China for the long haul.
The largest Chinese bank, Industrial & Commercial Bank of China Ltd., finalized a $3.8 billion pact last month for a consortium led by Goldman Sachs Group Inc. to buy a 10% stake. ICBC wants to go public by the end of the year.
The bank stakes give foreign investors broad exposure to all sectors of China's booming economy as the government is driving its lenders to overhaul. In the past two years, foreigners — including financial investors with no plans to do any banking in China, such as Singapore's state investing arm, Temasek Holdings Pte. Ltd. and New York hedge fund Och-Ziff — have sunk more than $20 billion into the banking sector. Meanwhile, the Chinese government has spent more than 10 times that to resuscitate its banks so they can help stimulate domestic spending and provide capital for its businesses.
The government aims to transform China's banks from de facto cashiers of the state into commercially driven enterprises. It hopes they will draw on the expertise of foreign financial institutions to improve their risk management, develop products and put in place stricter oversight.
What investors get, beyond the return on their investments, is access to China's biggest lenders and their client lists, and an inside view of banking in the world's fourth-biggest economy. In addition, the foreign banks can ingratiate themselves with Chinese authorities by helping to build confidence in a financial sector better known for poor management, corruption and lax lending policies.
“There is a level of enhanced access to the Chinese economy which isn't immediately obvious to the naked eye,” says Matthew Ginsburg, a managing director at Morgan Stanley, which advised on China Construction's listing.
Risks like China's chronic bad-loan problem have in part been mitigated through guarantees that the Chinese banks have made against future financial troubles. A recent Standard & Poor's Corp. report said the sector is high-risk in comparison with its global peers, but found that profitability, asset quality and the quality of information have improved. Asked if S&P expected China to change the 25% cap on foreign ownership in Chinese banks, Ping Chew, an analyst, said there won't be a “general liberalization,” but it could be done on a case-by-case basis.
Citigroup Inc. and Société Générale SA of France are fighting tooth and nail for the two companies and their partners to get an 85% stake in Guangdong Development Bank, a midsize lender in desperate need of capital to offset a balance sheet laden with bad loans. Citigroup is seeking an exemption to the foreign-ownership limit so it can hold between 40% and 45%, while Société Générale's eventual portion would be within current rules of 25% maximum foreign ownership.
China has frequently sold stakes to foreign companies in the same line of business before state-owned enterprises go public, to increase confidence in the share sale. Those arrangements have generally resulted in handsome profits for the investors, though not always in lasting partnerships. Royal Dutch Shell PLC and BP PLC, for instance, bought stakes in China's major oil companies before they went public and sold those stakes, for substantial gains, after the three-year lockup expired.
The situation is a bit different for the banks, because China is opening its vast retail-banking market to foreign institutions at the end of the year, under its World Trade Organization obligations. Foreign investors will then have a shot at China's $1.7 trillion in savings.
But foreign banks' true access to that money is limited by their tiny branch networks. HSBC has the biggest presence of any foreign bank in China, with its 20 banking outlets, compared with some 20,000 for ICBC, the country's biggest bank.
At present, one small local bank is effectively controlled by a foreign party. Private-equity firm Newbridge Capital has about an 18% stake in Shenzhen Development Bank, a lender with a broad base of shareholders with small stakes, that it purchased at the end of 2004.
The Chinese company's chairman, Frank Newman, a former Bankers Trust chief executive, says control has been essential to make the changes needed to bring the Chinese lender closer to modern banking. “Chinese banks historically have been very decentralized,” he says. “There are some functions, particularly credit and management functions, that need to be more coordinated across the entire bank.” Mr. Newman is a director of Dow Jones & Co., which publishes The Wall Street Journal. The lender has pulled back from marginal businesses with low returns, such as transactions between banks.
The investors that have cast their lot with China's biggest banks won't enjoy that kind of control. China isn't expected to allow foreigners to control any of its biggest four banks, which control more than 50% of banking assets.
Bank of America, for instance, has a seven-year strategic alliance with China Construction that involves committing the equivalent of 50 Bank of America employees' time to work at the bank, an institution with 14,000 branches and 300,000 employees. Bank of America has one seat on a 15-person board. The two sides have agreed to discuss a potential credit-card joint venture in China. As part of this, Bank of America agreed to withdraw from retail banking in China, though it retains its corporate and commercial-banking presence.
Investors “have these short-term windfalls and huge returns on their investments,” says Mei Yan, a banking analyst at Moody's Investors Service in Hong Kong. As to the chance they will find long-term partners, she says, “we have questions in our mind whether eventually that will work out or not.”
Write to Kate Linebaugh at [email protected] read more