Oil Drive Debated

Study cites losses from China's investments abroad.
An analysis by Michael Lelyveld
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Employees work in an oil rig operated by Cuba and China, April 18, 2011.
Employees work in an oil rig operated by Cuba and China, April 18, 2011.

A critical report has raised doubts about China's strategy for securing foreign oil supplies, noting that most of its overseas investments have been unprofitable.

The China University of Petroleum study found that two-thirds of the 144 foreign investments by China's three national oil companies (NOCs) have sustained losses, the 21st Century Business Herald said.

The paper also found fault with the companies for bringing very little oil back to China's domestic market after investing U.S. $70 billion abroad in some 50 countries.

Last year, China National Oil Corp. (CNPC) shipped just 5 million tons (100,000 barrels per day) of crude back to China, or one-twelfth of its interests in overseas production, the Guangzhou-based daily said.

The report, citing information from the China Petroleum and Chemical Industry Association, raised questions about the benefits of the foreign investments, which accounted for 20 percent of the world's mergers and acquisitions in the sector last year.

"As state-owned companies, the oil giants should supply oil for the country and its strategic reserves," said Wang Yong, a former China Chamber of Commerce petroleum official, according to the report, relayed by the official English-language China Daily.

The complaints about CNPC, China Petrochemical Corp. (Sinopec), and China National Offshore Oil Corp. (CNOOC) seem to be part of broader criticism of state-owned companies.

"Not only the three companies, but many centrally-administered state-owned companies have suffered shocking losses," said an unidentified official of the State Council's Development Research Center.

The official blamed wrong decisions, investment failure and "arrogance," the reports said.

Driven abroad

But a new book on China's oil policies suggests that the criticisms may miss some of the reasons for the overseas investment.

In their study, "China, Oil and Global Politics," energy experts Philip Andrews-Speed and Roland Dannreuther argue that China's government has been driven to look abroad since the country became a net oil importer in 1993.

China's oil demand has far outstripped domestic production since then. In 2010, oil imports accounted for 54 percent of the country's consumption of 8.8 million barrels a day, according to National Bureau of Statistics (NBS) data.

In the first five months of this year, China's import dependency hit a new high of 55.2 percent, surpassing that of the United States, the Ministry of Industry and Information Technology said.

While the government has encouraged investment abroad to ensure security of supply, the companies have been motivated by the need to compensate for slow domestic output and price controls on fuel.

"With limited opportunity at home, the Chinese companies have been forced to go overseas in order to secure their long-term survival," the authors wrote.

"With tightly controlled energy markets at home, China's oil companies have evident incentives to invest abroad in such a way that they can sell their products at international prices with no restrictions."

High-speed investment

Despite its "disjointed" energy policies, China has sought foreign oil much as other growing economies, the analysts said. The difference has been the remarkable pace of investment growth.

Between 2002 and 2006, China's NOCs pumped some U.S. $20 billion into more than 30 countries with a surge of oil deals. "Such a level of overseas investment by a single country's NOCs was quite unprecedented," the analysts said.

In comments on the reported losses from the foreign investments, Andrews-Speed said they could take a decade to pay off.

"You can't really look at a set of companies that have only just started investing overseas in a big way and say they're not making money," he said.

The complaints may be the result of misunderstanding of the industry and the time needed for investment returns, he said. But they may also reflect popular resentment of the NOCs.

"It seems to be part of a wider distrust and dislike of the favoritism that is apparently being given by the government to the state-owned enterprises at the expense of ordinary people," said Andrews-Speed.

Ironically, CNPC itself has cited losses on one of its largest foreign investments, the 2,000-kilometer (1,242-mile) Central Asian Gas Pipeline stretching across Kazakhstan and Uzbekistan to gas fields in Turkmenistan.

Last September, CNPC complained to the National Development and Reform Commission that it was losing money on Turkmen gas imports, but the problem was blamed on China's domestic price controls, not sales of resources abroad.

In April, Beijing-based Caijing Online reported that the company lost 5 billion yuan (U.S. $776 million) on Central Asian gas deliveries last year because China's controlled prices were lower than import costs.

CNPC's overall operations have been profitable, however. In 2010, the company reported net earnings of 124.1 billion yuan (U.S. $19.2 billion), up 42 percent from a year earlier.

On July 28, CNPC said its overseas oil and gas production in the first half of this year rose by the equivalent of 219,000 barrels per day.





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