By Gustavo Coronel | February 7, 2011
Communist China’s economy is nearly four times as large as India’s or Russia’s. With a population of over 1.3 billion and one of the highest rates of economic growth in the world, China is undertaking a massive, global hunt for sources of raw materials and energy. In the field of energy, China has been conducting a drive to secure new oil and gas sources in countries such as Iran, Venezuela, Brazil, Cuba, Indonesia, Nigeria, Australia, Argentina and even the United States. This search is largely being conducted by fully state-owned companies such as Sinopec and CNOOC, the China National Offshore Oil Corporation and supported by very large actual or promised investments on the order of some $60 billion. The Hong Kong listed CNOOC is based in Beijing. All in all, China has lent some $110 billion to other countries in the last two years, more than the World Bank, a good portion of this money directly linked to energy projects.
If successful, this global search for energy would yield significant new sources of oil and gas to China, which attempts to buy entire fields not just product production, preferring to import from its own sources. China’s acquisitions, therefore, tend to add to its reserves and eliminate supply from the global marketplace. Consequently, in almost all countries China faces substantial political and technical hurdles. The U.S. is no exception.
Along with the large U.S.-China trade deficit come waves of capital flow to Beijing. Meanwhile, President Obama’s position, and hence U.S. policy toward Chinese investments, is to encourage more “passive” rather than “majority” investments. This position was emphasized during President Hu Jintao’s January visit in meetings between Chinese and American business leaders further enabling China’s investments to skirt national security concerns.
China in the US
In the United States, CNOOC has closed two multibillion-dollar deals for shale oil and gas plays, one in South Texas and the second in Colorado-Wyoming both through Chesapeake Energy. As Monica Hatcher reported in the October 12, 2010 edition of the Houston Chronicle, “State-owned Chinese energy giant CNOOC is buying a multibillion-dollar stake in 600,000 acres of South Texas oil and gas fields, potentially testing the political waters for further expansion into U.S. energy reserves.” The Eagle Ford Shale formation, according to Hatcher, “runs largely from southwest of San Antonio to the Mexican border.” By November 15, 2010, CNOOC had completed its 33% acquisition in Oklahoma-based Chesapeake Energy’s Eagle Ford shale project. Such a stake would provide China with future production of up to 500,000 barrels of oil equivalent per day, mostly in the form of natural gas.
The Chesapeake-CNOOC joint venture announcement regarding the project cooperation agreement for the South Texas oil and natural gas fields stated in part:
“CNOOC International Limited, a wholly owned subsidiary of CNOOC Limited, purchased a 33.3% undivided interest in Chesapeake’s 600,000 net oil and natural gas leasehold acres in the Eagle Ford Shale project in South Texas. The consideration for the transaction was $1.08 billion in cash, plus an additional $40 million payment adjustment at closing. In addition, CNOOC Limited has agreed to fund 75% of Chesapeake’s share of drilling and completion costs up to $1.08 billion, which Chesapeake expects to occur by year-end 2012.”
This transaction represents the second attempt by China to enter the U.S. energy sector, after the failed foray at buying UNOCAL in 2005, the California oil and gas company. During the Bush administration there was intense political opposition to that $18.4 billion transaction. This time around the silence has been deafening with nary a whisper of opposition heard from either Congress or the Obama administration, which has encouraged cooperation with China.
At the outset there seemed to be a much greater probability of a Chesapeake deal, since it involved a largely financial acquisition without any apparent direct technological transfer or any active presence of Chinese personnel in the operations or management of the company. National Security implications evident during China’s attempted takeover of UNOCAL, which it ultimately lost to Chevron, appeared less obvious in its bid for the 33% stake of Chesapeake Energy’s Eagle Ford shale oil project. The “projection” of up to 20,000 new regional jobs was another favorable factor working for this transaction.
On February 1, 2011, China Daily reported a second shale oil and gas deal for CNOOC, again with Chesapeake Energy, this time involving its Niobrara Shale project located in Wyoming and Colorado. The Niobrara shale rock formation covers northeast Colorado, southeast Wyoming, southwest Nebraska and northwest Kansas. CNOOC is reportedly investing $570 million to buy a 33% stake in the project, which is listed as DJ (Denver-Julesburg) and Powder River Basins. Chesapeake’s Investor Presentation for February 2011 indicated it “sold a 33.3% interest in 800,000 net acres” to CNOOC for “$1.3 billion or $4,750 per net acre.”
According to China Daily, “The deal follows President Hu Jintao’s state visit to the United States in January to expand economic ties…. If you look at President Hu’s recent trip to Washington, there seems to be a greater willingness in the US to encourage Chinese investment.”
The joint venture deal is expected to close by March 2011.
China in Iran
Allowing China to enter the U.S. energy sector contrasts with America’s foreign policy toward Iran, in which the Obama administration is exerting pressure on China not to enter the Iranian energy sector. Despite these pressures, the presence of China in Iran’s gigantic natural gas fields of North and South Pars is already substantial, in defiance of U.S. warnings. The Pars natural gas fields, with recoverable reserves of some 450 trillion cubic feet inside Iranian territory, are the largest deposits of its kind in the world, with still larger resources lying in Qatar. Through negotiations concluded in 2006 and 2009, China agreed to help Iran to develop these gas deposits, committing investments on the order of $20 billion for this purpose, according to the September 13, 2010 report in the Wall Street Journal — “To pressure Iran, squeeze Russia and China,” by Marc Gerecht and Mac Dubowitz. China is also developing Iranian oil fields and increasing Iran’s capacity to refine crude oil at the Tabriz, Arac and Abadan refineries, as well as expanding Iranian oil production, in established fields of North Azadegan, South Azadegan and Kuhdasht.” The U.S. – Iranian political tensions, with no solution in sight, could adversely affect China’s efforts to enter the U.S. domestic energy sector.
China in Brazil
In Brazil, China has offered to provide a portion of the Brazilian state-controlled oil company, Petrobras, with financial requirements in its plans to develop offshore hydrocarbon fields. Petrobras will need to invest about $175 billion during the next five years and China will be providing at least $20 billion of this amount. In exchange, Petrobras would eventually ship 200,000 barrels of oil per day to Chinese refineries. The Brazilian government explains this agreement with China by the easy manner in which they can establish government-to-government agreements, while other countries, such as the U.S., cannot do the same. Paradoxically, the weakness of this deal has to do with its nature. A purely commercial relation, such as one that would be established between Petrobras and a private oil company, would probably be much more stable than a government-to-government relationship, in which issues of national interest and sovereignty, valid for both nations, could cause complications.
China in Cuba
In Cuba, China has signed a contract with the Cuban government to expand the Cienfuegos refinery at a cost of some $6 billion. This expansion would double the capacity of the refinery to process up to 150,000 barrels per day, including a train of liquefied natural gas, LNG. This project is clearly related to Cuban hopes of finding substantial oil resources in its portion of the Gulf of Mexico (see: “Petroleum in Cuba: Current situation and mid-term outlook”, SFPPR News&Analysis, January 18, 2011). The project is being offered financial guarantees by Venezuela, Cuba’s main political ally in the Western Hemisphere. The problem with this project is the uncertainty related to future oil resources in the Cuban offshore, since the refinery would need a guaranteed source of oil to operate for, say, 30 years. The knowledge at hand of probable reserve expectations in the Cuban offshore does not seem to support this assumption.
China in Argentina
China’s state company Sinopec announced in December 2010 that it would acquire the assets of Occidental Petroleum Company in Argentina for $2.45 billion. Also in late 2010, Bridas, an oil company jointly owned by China’s CNOOC and the Argentinean Bulgheroni family, agreed to pay BP Plc $7.06 billion for the 60 percent it doesn’t already own of Pan American Energy LLC. This deal will most probably be completed in early 2011. Such a transaction will give Bridas total access to about 250,000 barrels per day of oil production and proven reserves of 1.5 billion barrels.
China in Venezuela
Next to the Iranian investments, the largest stake China is acquiring in the energy sector of other countries is in Venezuela, where the leftist regime of Hugo Chavez has granted them the rights to develop a block of proven heavy oil reserves in the Orinoco region. In this block China plans to produce up to 400,000 barrels of heavy oil per day by 2016, investing about $16 billion. China has given Venezuela a loan of $20 billion, to be paid back by Venezuela with 200,000 barrels of oil per day for the next 10 years. According a report by Evan Ellis in Air and Space Power (Vol. XXII, #3, third quarter 2010), Venezuela is one of the four main partners of China in Latin America, with more than 300 agreements of the most diverse nature, including weaponry and airplanes, and about 80 projects in different stages of development. China has given Venezuela loans for $28 billion and is committed to invest another $16 billion. Commercial trade in 2009 exceeded $8.5 billion.
Apart from its strategic significance, the China-Venezuela relationship is very risky to China for several reasons. One is technical and has to do with the logistics of developing the Orinoco oil block. The requirements in materials, technical staffing and support this massive activity will require contrasts with a highly disorganized Venezuelan oil industry. This makes it highly unlikely that China will be able to accomplish its objectives in this area, at least in the projected time frame. The second risk has to do with the unsteady domestic political situation in Venezuela. While the development of these projects takes between 8 to 10 years, there is a likelihood that the Chavez government may not be in power beyond 2012. If this happened, the agreements entered into by Caracas and Beijing would be at high risk of being repudiated by a new Venezuelan government, as not being in the best interests of the nation. Still a third risk involves the China-U.S. relationship. Ellis observes that this relationship is the most important for China to preserve, above any other in the hemisphere. If the Chavez regime continues with a policy of harassment and tensions towards the U.S., as has been the case so far, China might feel forced to choose between the two countries, according to Ellis. This view, however, fails to take into account China’s growing rivalry with the U.S. and its own energy interests along with a compliant American president.
China in Indonesia
For almost ten years after buying the Indonesian interests of the U.S. company Devon Energy Corporation, the state-owned Chinese company PetroChina has been active in Indonesia. Today it has a production of close to 110,000 barrels of oil per day. In 2010, PetroChina is reported to have invested about $600 million in the country, mostly in exploration and production activity, including 23 new exploration wells. The most important holding of PetroChina in Indonesia is in East Java’s Tuban oilfield, said to have some 2 billion barrels of oil reserves.
China in Nigeria
Starting in 2005, China’s state-owned oil company Sinopec established small volumes of oil production in Nigeria. In 2009 the company acquired Addax Petroleum from private oilman Jean Claude Gandur for $7.2 billion, gaining access to oil licenses for more than half a million acres and a production in the order of 80,000 barrels per day. In 2010, CNOOC started negotiations to buy into six billion barrels of Nigerian oil reserves from the Nigerian government. These reserves are located in areas currently operated by other companies, such as Shell (British-Dutch), Total (French) and Chevron (American). China’s initial bid of some $30 billion was rejected but negotiations continue.
In parallel, China has signed a $23 billion agreement with the government to build three oil refineries as well as a petrochemical plant. The refineries would have a combined refining capacity of close to 900,000 barrels per day.
China in Australia
In Australia, the China National Petroleum Corporation (CNPC) signed a Memorandum of Understanding with Chevron to finance and partially off-take the liquefied natural gas production from Chevron’s Wheatstone project. Chinese financing would possibly allow Chevron to expand the project from two to six trains or processing units. This agreement opens the possibility of joint oil and gas exploration activities in Australia by the Chinese company and Chevron.
In 2010, CNOOC, the China National Offshore Oil Corp, decided to buy LNG from BG Group Plc’s proposed export terminal in Queensland. On the basis of this agreement, China gained access to some 3.6 million metric tons of LNG yearly for the next twenty years, starting in 2014. The deal is estimated to be worth more than $80 billion.
China’s Aggressive Presence in Latin America Poses a Challenge to the U.S.
Despite all of the difficulties that China might encounter in its search for new energy sources, its pro-active attitude in establishing commercial links with other countries contrasts with the relative retrenchment shown by President Obama over the first two years of his administration.
This is especially the case in Latin America where exports to China have nearly doubled, from $22.3 billion in 2006 to $41.3 billion in 2009. The Economic Commission for Latin America, ECLA, estimates that by 2015 China might overtake the European Union as Latin America’s second largest export destination. Inter-American Development Bank economists have pointed out that China played an important stabilizing role in Latin America and the Caribbean during the recent global financial crisis. In fact, as the world’s exports fell in 2009, Latin American exports to China grew.
The commercial presence of China in the Western Hemisphere seems bound to increase, including an expanding role in the all-important energy sector. This poses a mid to long-term challenge for the United States, still the number one commercial partner of Latin America.
Gustavo Coronel, who served on the board of directors of Petróleos de Venezuela (PdVSA), has had a long and distinguished career in the international petroleum industry, including in the USA, Europe, Venezuela and Indonesia. He is an author, public policy expert and contributor to