rseas investments in oil and gas production
Chinas overseas investments
in oil and gas production
Contents
I. Overview Chinas Go Out policy for energy security . . . . . . . . . . . . . . . . 2
II. General trends in investment . . . . . . . . . . . . . . . . . . . . . . . . . 4
III. Decision-making process for Chinese state-owned companies . . . . . . . . . . . . . . 6
IV. Physical security measures . . . . . . . . . . . . . . . . . . . . . . . . . . 8
V. Key countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Middle East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
North Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Russia and Eurasia . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Southeast Asia/Australia . . . . . . . . . . . . . . . . . . . . . . . . . 17
Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Sub-Saharan Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
VI. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Report issued 16 October 2006
Prepared for the US-China Economic and Security Review Commission
This confidential report is intended solely for the internal use of the US-China Economic and Security Review Commission and is based on
the opinions of Eurasia Group analysts and various in-country specialists . This report is not intended to serve as investment advice, and it
makes no representations concerning the credit worthiness of any company . Eurasia Group is a private research and consulting firm that
maintains no affiliations with governments or political parties .
© 2006, Eurasia Group, 475 Fifth Avenue, 14th Floor, New York, New York 10017 Chinas overseas investments in oil and gas production
Prepared for the US-China Economic and Security Review Commission | 16 October 2006
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I. Overview Chinas Go Out policy for energy security
China considers its energy supplies, particularly oil and natural gas, to be increasingly insecure.
While prior to 1993 it was a net oil exporter, China now has the largest annual increases in oil con-
sumption in the world, forecast to run at a rate of around 500,000 barrels per day (bpd) in 2006
and 2007 by the US Department of Energy. This is being driven by economic growth of about 10%
per year. Despite efforts to slow this runaway growth rate, China will still be the largest single driver
of growth in oil consumption during the next decade. Meanwhile, its domestic oil production, while
substantial at 3.8 million bpd, is forecast to remain relatively flat or decline slightly, so all incremen-
tal increases in demand will have to be satisfied by imports.
China is also developing its natural gas sector, which has historically not been a major part of
its fuel mix it currently constitutes about 3%. In June 2006, however, China became a natural gas
importer for the first time with the opening of the Guangdong liquefied natural gas (LNG) import
terminal, which is supplied mainly from Australia. In the future, natural gas imports are likely to
grow, with additional LNG import terminals and pipelines under consideration that would link
demand centers in China to supplies in Russia and Central Asia.
The Chinese leadership wants to pursue policies that will secure supplies of oil and natural gas
and cement a strengthened role for the major Chinese oil and gas companies. While the govern-
ments of many Western countries, including the United States, usually take a relatively hands off ap-
proach to intervening in oil companies investment and purchasing decisions, there is a consensus in
China that the state must use policy tools to secure ownership of foreign upstream production assets
by Chinese companies. Chinas strategy of investing in equity stakes to obtain control of overseas
energy assets began in the early 1990s, around the time the country became a net importer of oil. It
intensified as imports grew, and rose to the top of Chinas foreign policy priorities following the 11
September 2001 terrorist attacks in the United States, which contributed to a perception of a less
stable world and greater risks to energy production, particularly in the Middle East.
The increased reliance on imports has also given China greater impetus for improving its power-
projection capabilities, including the acquisition of basing rights and port-call arrangements along
key oil shipping routes in the Indian Ocean. It has also led to the use of other foreign policy tools,
such as arms sales and foreign aid, to promote the competitive interests of the major Chinese oil
companies in the acquisition of production assets.
Chinese policy aims to diversify the countrys suppliers of crude oil, but as is the case for most
major importers, their ability to achieve such policy goals is limited. Historically, Chinese imports
have been skewed toward countries capable of producing very light, low-sulfur grades of crude oil,
such as Oman and some of the West African countries. This is due to the scarcity of refining capac-
ity in China for processing heavy and high-sulfur grades. As new refineries are built, this constraint
will lessen. Over time China will likely be able to diversify supplies to some degree due to its equity
investments in upstream production projects. Nonetheless, the Persian Gulf has the worlds greatest
oil reserves, and its share of world production capacity will continue to grow in the future. That
will make it difficult for China, the worlds fastest-growing importer, to find adequate supplies else-
where. While diversification away from the Persian Gulf remains a goal, some of the larger projects
that the major Chinese oil companies are currently contemplating involve production assets in Per- Chinas overseas investments in oil and gas production
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sian Gulf OPEC member states. Sinopecs interest in the development of the Yadavaran oil and LNG
project in Iran is a prime example.
Thus far, the results of the Chinese drive to obtain equity oil oil that Chinese firms have a
right to take or market as a result equity ownership in development projects has been quite mod-
est. Some of the projects with Chinese ownership stakes must sell to local markets due to obstacles
preventing transportation of the oil to China. It is difficult to know precisely how much equity oil
produced by Chinese firms abroad actually goes to China, since the data on imports published by
the Chinese Customs Bureau specify only countries of origin rather than specific export streams
from specific development projects. By examining the large volume of press reporting on these proj-
ects, however, including in the Chinese-language business press, it is possible to piece together the
general picture. Overall, based on the analysis in this study, it appears that the amount of equity oil
flowing into China in 2006 is only about 320,000 bpd, out of total imports of 3.6 million bpd and
total Chinese consumption of 7.4 million bpd.
Due to the modest volumes involved, Chinas equity investments have relatively little influence
on the world oil market. Chinese demand is one of the main drivers for oil prices, as the country
currently has the largest absolute growth in demand anywhere, but more than 90% of its imports
do not originate with equity oil projects in which Chinese firms have invested. There are some seri-
ous challenges for US policy, however, related to the Chinese drive to control more of its oil supplies.
Some stem from the development of Chinese military power projection capabilities as a response to
perceived vulnerability of oil imports. Others relate to Chinas sources of competitive advantage.
Chinese oil companies enjoy several major advantages over Western firms under some circum-
stances, some of which involve Chinas adoption of energy-driven policies in other spheres that
can be detrimental to US interests. Chinese firms can enter countries where international sanctions
restrict activities by US or European firms, and have access to financing from state-owned banks,
which are willing to back projects whose risk-versus-return tradeoffs would seldom appeal to ordi-
nary investors. Chinas existing projects in Sudan, as well as the preliminary agreement by Sinopec
to develop the Yadavaran oilfield