KDS/AGES/China?: They have little oil, but lots of poop,
Jan. 17, 2005, 12:34PM
A thirsty China
Desire to ensure energy supply fueling widespread action that could change the balance of power in the world oil away from today's giants
By LYNN COOK
Copyright 2005 Houston Chronicle
When the rumor surfaced last week that China National Offshore Oil Co. wanted to buy Unocal, it raised more than a few eyebrows.
At first blush, the idea that a state-controlled company from communist China could buy one of this country's oldest oil companies seems highly improbable.
El Segundo, Calif.-based Unocal has fiercely fended off past takeover attempts, first with a shareholder revolt in the 1920s when Shell bought up a 25 percent stake and, more recently, by assuming gobs of debt in the 1980s to repel an assault by then-corporate raider Boone Pickens.
Two decades after his run at Unocal, Pickens understands why the company finds itself in China's cross hairs. When it comes to oil, China is like a sponge.
Thanks to an economy that just won't quit, the country has doubled its crude oil imports since 2000. That imports are expected to quadruple between now and 2025 has catapulted energy security to the top of the Chinese government's list of priorities.
China's state-controlled oil companies have fanned out across the globe in the hunt for more fossil fuels, and the country's seemingly unslakable thirst for oil is provoking some hysteria about how they are forging deals in every corner of the world. The big fear: The playing field will shift to favor China's oil company model over Big Oil companies such as ChevronTexaco and ConocoPhillips.
"I'd be surprised if it actually happens,"
Pickens says of the proposed China National-Unocal deal.
"But it's obvious why they are doing it. They've scattered like Oklahoma bank robbers. They're everywhere."
Chinese oil companies are even trying to hammer out deals in the Canadian oil sands, where Pickens is heavily invested through Suncor.
Unexpected flow of capital
This isn't how people expected capital to flow.
Jay Cuclis, head of Vinson & Elkins' international practice, says the firm opened in Beijing in 1997 to help Westerners place money in China and ended up taking an increasing amount of work on behalf of Chinese firms investing in energy abroad. All three of China's major oil companies — China Offshore Oil, China National Petroleum Co. and Sinopec — have been clients.
"As a group, these companies have accumulated lots of cash and are now powerful bidders," Cuclis says. "Investment bankers setting up auctions have the Chinese at the top of their lists because they have a voracious appetite for energy and the money to buy it."
China's mad dash for oil is spurred on by its status as the low-cost manufacturer for the world. As such, the country's standard of living is on the rise, and fueling all that growth takes a lot of energy.
In the past, China's oil outfits have played second string to Big Oil, but they are increasingly winning oil and natural gas concessions in Central Asia, the Middle East and Latin America.
Kang Wu, an analyst with the East-West Center, says two factors have collided to embolden Chinese oil companies. First, they have a monopoly on markets at home and enjoy fairly high prices. Second, they are getting low-cost financing through China's state-owned banks.
"With 1.3 billion people in China, even small margins add up to big dollars," he says. "The powers that be are encouraging them to go overseas. The government's energy security policy coincides with the companies' self-interest."
But Kang thinks much of the talk about Chinese oil companies' new status is overblown. Western companies have a lock on many of the world's most prolific fields. Many promising prospects are under countries where national oil companies control reserves.
"The Chinese have been aggressive when majors are tired of an investment or their stock value can't take the risk. Then they can move in and make all kinds of deals," Kang says. "They're becoming bigger and bigger — you could even say impressive — but I wouldn't say they're becoming better and better."
Long memories
Failures of the past are still fresh in their minds.
In the 1970s, Japan National Oil Co. poured too much money into high-risk wildcatting for new oil reserves. Billions of dollars later, it was forced to retrench. Chinese companies are trying to avoid those kinds of costly mistakes by taking equity positions in established projects and fields where they feel they can't lose.
Because these companies are not beholden to shareholders, they can settle for lower returns and venture into politically unsavory regions.
Forty percent of China's oil imports come from Iran, where U.S. sanctions keep American companies from participating. An additional 7 percent comes from civil-war ravaged Sudan.
Human Rights Watch has observed Chinese operations in Sudan, but they are notoriously opaque. Rumors have long swirled that many of the 10,000 Chinese laborers shipped over to build a pipeline were prisoners.
"They have their own human rights record that we are upset with," activist Jemera Rone says.
While China's oil companies have traditionally made their biggest forays into the Middle East on deals too marginal for major oil companies, such as small-scale exploration in Syria, now they are going head to head with Big Oil in Saudi Arabia.
One Persian Gulf source says companies from across Asia are getting deals because Western oil companies are focused on stock buybacks.
"When we opened for natural gas, their bids were good, but others were more aggressive," he says, referring to Saudi Arabia. "The Asians are coming. We are getting our terms."
Western expertise
Catherine Hunter, Middle East analyst for World Markets Research Center, says Saudi Arabia and other Persian Gulf nations still prefer Western oil companies on big projects for their technical expertise.
"It's only when they are struggling to find Westerners on their terms" that they
curry favor, she says. "As they gain more expertise and financial leverage, this could change."
Sinopec inked a deal for an 80 percent stake in natural gas exploration in Saudi Arabia's Empty Quarter, a risky position most independent oil companies can't stomach. Hunter says Shell and Total also have Empty Quarter agreements, but those stakes are in the 30 percent to 40 percent range.
Politicized deals often involve governments hashing out a deal that encompasses a variety of projects. China will often throw in food exports, such as rice, or grant access to its mobile phone market.
''These are complex deals where you see a mixture of upstream, downstream, LNG and non-energy all bundled up in one massive deal.
"It's really something they can't achieve," Hunter says of the majors.
China's government appears to be wooing Venezuela, the world's fifth-largest oil producer, in just this way.
While U.S. politicians wring their hands over dependence on Middle Eastern oil, President Hugo Chavez is trying to find other outlets for his oil.
Kang says if there's any country that holds more promise for export than the United States, it's China, the world's second-largest consumer of oil.
"Their politics are very similar, and China's a huge market," Kang says.
"There aren't a whole lot of socialist countries that actually have markets. Most of the time it's just an ideology."
ljcook@chron.com
