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Financial Times: Energy: Beijing learns to tread warily

By Matthew Green
Published: January 23 2008 16:28 | Last updated: January 23 2008 16:28

Conventional wisdom suggests that China’s energy companies are marching across Africa, shoving aside established majors and grabbing huge oil reserves with the help of bottomless funding from Beijing.

A closer look reveals a more nuanced picture: China’s giants have won only a fraction of the continent’s crude, state backing has shown its limits, and they are perhaps more image-conscious than many people think.

China, projected to become the world’s biggest oil importer soon after 2010, is likely to seek ever greater supplies from Africa to keep the engines of its economic boom revving. But experts say its state-owned companies are likely to face a challenge finding the kind of low-profile, high-yielding fields that western majors may have overlooked.

“Chinese oil companies are looking for already-producing, or near-producing, low-visibility kinds of oil fields,” says Dapo Odesanya, a partner with Andaz Global Solutions, a Beijing-based oil and gas consultancy. “That is a very difficult combination of characteristics to get but that’s the kind of thing they’re looking for.”

In recent years, Chinese companies have made some inroads into the giant oilfields off West Africa, one of the world’s hottest exploration zones. In its most expensive acquisition, China National Offshore Oil Corporation (CNOOC) has finalised a payment of $2.7bn for a share of a lucrative oil block off Nigeria, Africa’s biggest crude exporter, that is due to start pumping this year. In Angola, Africa’s next biggest producer, China Petrochemical Corporation (Sinopec) has gained a 50 per cent stake in the BP-operated Greater Plutonio project. Such deals have fuelled concerns that China’s government is gobbling up vast reserves at the expense of the west.

But the numbers tell a different story. Chinese national oil companies produced about 267,000 barrels of oil equivalent a day in Africa in 2005 – only one-third of the amount produced by ExxonMobil, the largest foreign producer on the continent. Wood Mackenzie, the energy consultancy, reckons Chinese groups hold less than 2 per cent of Africa’s discovered oil and gas reserves.

“Contrary to public opinion, China’s national oil companies are not ‘locking up’ the lion’s share of African oil as part of a centralised quest for energy,” wrote Erica Downs, a China specialist with the Brookings Institution, in a recent paper. “With the exception of a handful of projects in Sudan, Nigeria and Angola, most of the African assets held by China’s national oil companies are of a size and quality of little interest to international oil companies.”

China’s biggest success with African oil – in Sudan – has only underscored the gulf between Chinese oil companies and their biggest US and European competitors. The China National Petroleum Corporation (CNPC) developed Sudanese oilfields during the 1990s when civil war barred most western companies. China now receives 60 per cent of Sudan’s oil output.

Allegations that Beijing has shielded the government in Khartoum from international pressure over a separate conflict in Darfur to protect its oil interests have tarnished China’s image.

But Beijing, seeking to forge a broader commercial partnership with Africa, appears keen to ensure its energy companies do not attract further negative publicity. Analysts point to moves by Chinese oil companies to establish themselves in countries that generally draw scant media attention, such as Gabon or Congo-Brazzaville, as evidence of a more softly-softly approach. Some analysts say China is also wary of the potential negative publicity that its companies may encounter if they ventured into the oil-rich but restive Niger Delta, where human rights activists have long accused western companies such as Royal Dutch Shell of exploiting local communities.

China’s search for prospects overlooked by the majors has nonetheless put its workers in harm’s way. Ethiopian rebels killed nine Chinese oil workers in the Ogaden region in April last year. And CNOOC has signed a production-sharing deal with the transitional government in Somalia, one of the world’s most volatile countries.

Part of China’s problem is that its companies are latecomers to Nigeria and Angola, which have some of the most attractive prospects, and where western rivals have spent decades building relationships and staking claims.

China ’s attempts to win friends by offering huge infrastructure investments in return for exploration rights, an option unavailable to the majors, has worried some policymakers. But the strategy has not always worked. China’s offer of a $2bn loan to rebuild infrastructure destroyed by years of civil war in Angola helped Sinopec gain entry into one of Africa’s most fiercely contested oil zones. But in Nigeria, CNPC’s offer to invest $2bn in a refinery to help secure oil blocks has fallen through. Exploration blocks granted by Kenya when China signed infrastructure deals during President Hu Jintao’s visit in April 2006 have proved disappointing – CNOOC gave four out of six of them back.

Ultimately, technology may also play a big part in determining China’s fortunes in African oil. China has considerable onshore experience but lacks the kind of expertise needed to exploit the most alluring deepwater exploration zones in the Gulf of Guinea. But governments may be reluctant to strike deals with Chinese companies which they fear may lack the big project management skills to get the best from their resources, or share cutting-edge technology with their indigenous energy companies.

With oil prices at record highs, governments can afford to be selective when choosing from the queues of western majors, as well as companies from India and South Korea, knocking on their doors. China’s oil industry is learning fast, however. Coupling strong state backing with better technology could provide international companies with formidable competition in future.

For now, though, China’s state giants are playing catch-up. “Chinese oil companies have reached a turning point in Africa,” says Stewart Williams, senior analyst at Wood Mackenzie, the energy consultancy. “They’ll need to move up the learning curve to produce oil and gas efficiently enough to compete with the majors.”

Copyright The Financial Times Limited 2008

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1 Comment on “Financial Times: Energy: Beijing learns to tread warily”

  1. #1 Nandakumar J
    on Jan 24th, 2008 at 00:29

    Dear Mr Mathew Green
    Interesting Piece. What do you see as the rationale you see behind China’s aggressive energy search?

    Dont you think that China’s which is the highest populated country in the world have to address the basic needs of its people? And we need to keep in mind that China still consumes only about 7 million barrels of oil per day, while US consumes about 25 million barrels of crude for a much lesser population. I believe there should be greater efforts to be made from the developed economies to minimise their energy consumption instread of simply blaming the developing countreis of their energy search. We also do have to understand that China still relies more on the domestically produced petroleum fuels for consumption.

    What can be a sulotion for this? Will any hue and cry about china’s energy consumption will help the global economies reduce their energy consumption? No.

    There also need to be efforts for energy conservation and spread of new and alternative energy technologies. A time bound plan to minimise dependency over petroleum fuels.

    Congrats once again for the excellent piece.

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