By XIAOXIONG YI • Columnist • October 7, 2009
Argentina, Australia, Burma, Kazakhstan, Iran, Iraq, Nigeria and Venezuela, what do these countries have in common? First, they are all energy-rich states. Second, they are all high on China's foreign policy priority list.
As Chinese economy expands, so does its thirst for oil and gas. Twenty years ago, China was the largest oil exporter in East Asia. Today, it is the world's second-largest energy importer and is set to become the largest soon. Last year, China alone accounted for more than 40 percent of global growth in oil demand.
China is now on an aggressive global quest to increase its supply of oil, and Chinese rulers hardly ever go anywhere these days without talking oil. As Dexter Roberts of Business Week summarizes, "China is interested in spending its $2 trillion in foreign exchange reserves on something other than just U.S. Treasuries. Hard assets, particularly much-needed resources, are one very good alternative and very much in favor from the government's perspective, too.
That has driven a flurry of oil and gas deals, including one by China's second-largest petro company Sinopec, which plans to spend $7.2 billion to buy Addax Petroleum, giving it access to assets in Nigeria and the Kurdish region of Iraq. China National Petroleum Corp too has recently made other big investments overseas, including in Kazakhstan and in Singapore, and won a joint bid with BP to acquire Iraqi oil assets. The company is also looking at possible deals in Mongolia."
Just to show how desperate China is to get its hands on energy resources around the world, last month, China National Petroleum Corp (CNPC) and China National Offshore Oil Corp (CNOOC) jointly proposed to pay at least $17 billion for Spain's largest oil producer Repsol's 84 percent stake in Argentine oil company, YPF. Such a deal would rank the largest overseas investment by China.
However, "The mystery," Financial Times' Gwen Robinson asks, "is why Chinese companies would want to pay $17 billion for less than premium upstream and downstream oil resources?" "The possible YPF deal is odd," says Keith Johnson of Wall Street Journal, "because Argentina's oil fields are old and tired, which Repsol has been trying to get rid of for years."
In Argentina, the Chinese are the only bidders interested in the YPF. Even YPF itself noted the "oddness" in the Chinese bid: "our oil and gas fields are mature, and our reserves and production are declining as reserves are depleted. We are engaged in efforts to mitigate these declines by adding reserves. But these efforts are subject to material risks and may prove unsuccessful due to risks inherent to the oil and gas industry."
Have the Chinese lost their marbles by wanting such a bad deal?
From Beijing's perspective, however, there is every reason for their Argentinean mega oil-bid. For one thing, as Fiona Maharg Bravo of Telegraph points out, "Chinese oil firms are hunting for oil in risky places where the majors didn't already have a big presence or where they were keen to sell, including Iraq and Argentina." Nick Lardy of the Peterson Institute writes, "If you are a new player and you have a substantial appetite for access to oil on some long-term basis, then you are more or less forced to go into high risk places where the majors are not willing to tread."
The YPF bid not only highlights China's eagerness for energy, but also serves Chinese oil conglomerates' strategic goals: to strengthen their global presence. Earlier this year, Chinese firms completed acquisitions of Australian miner OZ Mineral and Singapore Petroleum. Cash-rich, state-run Chinese oil conglomerates, boosted by financial support from the central government-China National Petroleum Corp announced in September that it had received $30 billion loan to finance its overseas acquisitions-are snapping up oil and gas fields worldwide at an astonishing rate. In the long- and short-run, that will increase the cost of oil, a crucial economic and strategic problem for the developed nations.
Chinese rulers are good students of former British Foreign Secretary Ernest Bevin, who once said, "The Kingdom of Heaven may run on peace and goodwill; but the Kingdom of Earth runs on oil." Oil is a strategic resource in more than one sense. As CNPC, Sinopec, and CNOOC are making big moves in Africa, Latin America, Middle East and Southeast Asia, Beijing's aggressive energy strategy is likely to become an increasingly important source of economic, as well as political tensions around the world.
Yi is a professor at Marietta College and director of the China Program.
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