Oil Sands Truth: Shut Down the Tar Sands

China's unquenchable thirst for oil

China's unquenchable thirst for oil
Despite recession, the Chinese are aggressively pursuing energy assets

Shawn McCarthy and Eric Reguly

Ottawa, Rome — Globe and Mail
Jun. 27, 2009

A refinery in Singapore. Oil and gas fields in Central Asia. A pipeline in Russia. Ultradeep crude deposits off Brazil. Production wells in Libya.

And now Toronto-listed Addax Petroleum Corp., (AXC-T49.930.180.36%) with its oil fields in western Africa and Iraq's Kurdistan.

China's cash-rich, state-controlled oil companies and its state development bank are on a buying spree, taking advantage of low crude prices and shrunken credit markets to snap up global assets that will help feed the country's enormous appetite for energy.

The Chinese are the most aggressive deal makers in the international oil industry right now, either through straight acquisitions or through innovative loans to foreign oil companies with crude as the currency of repayment.

Sinopec, the country's largest petroleum refiner, Wednesday continued its drive to boost the production side of its business by agreeing to acquire Addax for $52.50 a share, valuing the company at more than $8-billion. Sinopec's offer for Addax represents a 47-per-cent premium to the share price on June 5, the day before Addax announced it was in discussions with a potential buyer.

But while Chinese firms scour the globe for resources – encouraged by a central government that sees energy security as a key priority – they've shown only lukewarm interest in the world's second largest reserve base, Alberta's oil sands.

“Over all, their strategy is mainly to diversify and cut down on having half of their oil come from the Middle East,” said Steven Lewis, a China expert at the James Baker Institute at Rice University in Houston. “They know their demand is rising very quickly and there are only a few places around the world that are still being explored.”

Mr. Lewis said the Chinese focus on Central Asia, Africa and Latin America is more an accident of geography than a geopolitical attempt to supplant the United States as the dominant global player. Those are the regions that happen to contain the most exciting, lowest-cost discoveries.

The Chinese investment is widely welcomed in the global oil market where spending has declined dramatically after prices slumped from the record $174 (U.S.) a barrel touched just a year ago. The drop in investment could spark shortages and another runup in prices when the global economy begins to recover.

But there is a nagging concern that China may hoard resources if supplies tighten or the conflict in the Middle East threatens production there, and that the booming Asian giant would meet its energy security needs at the expense of Western nations.

Sinopec's purchase of Addax Petroleum is one of the strongest signs yet that China's international resources grab is real and gaining momentum.

Even as Sinopec was concluding that agreement, another state-owned oil giant, China National Offshore Oil Corp. (CNOOC) was reportedly in negotiations to buy Texas-based Kosmos Energy. Kosmos, like Addax, is focused on exploration and development in West Africa, one of the last frontiers for oil discovery.

Still another Chinese oil giant, China National Petroleum Corp. (CNPC), is on the prowl too. In February it paid $449-million (Canadian) for Verenex Energy, a Calgary company whose core operations are in Libya. Late last year, Sinopec paid about $2-billion for another Calgary company, Tanganyika Oil, which has production-sharing agreements in Syria.

Addax controlling shareholder, founder and billionaire Jean-Claude Gandur, has long believed Chinese companies would come after the company to help quench the country's deep thirst for oil. He has said the Chinese are highly tolerant of political risk and know how to win the hearts and minds of leaders in poor countries. They often do so by investing fortunes in local infrastructure, from road to hospitals.

In Nigeria, for example, a $2-billion (U.S.) infrastructure and energy deal gave the Chinese a 45-per-cent stake in the offshore Akpo field. Deals of the same size or bigger have been negotiated in Sudan and Angola, with smaller ones in Algeria, Libya, Congo and Zimbabwe.

In a few cases, the Chinese negotiate “off-take” deals, sometimes called bilateral deals. In these arrangements, the buyer demands that the commodity – oil, natural gas, base minerals, iron ore – is kept off the public markets such as the London Metal Exchange. There are no intermediaries and no one else can buy the commodity.

But some of the biggest Chinese oil deals have been made by the China Development Bank, a cash-flush, state-owned fund that has agreed to help finance energy development in Brazil, Congo, Kazakhstan, Russia, and Venezuela – often to be repaid with oil, and often with development side deals for Chinese companies.

In February, the China Development Bank agreed to lend $25-billion to OAO Rosneft, Russia's biggest oil producer, and OAO Transneft, the oil pipeline operator, to expand production and export capacity. In exchange, the companies will provide the China Development Bank with 15 million metric tonnes of crude per year, or the equivalent of 300,000 barrels a day.

In Brazil, Petroleo Brasileiro SA (or Petrobras) signed a co-operation agreement with China Development Bank and Sinopec that includes a $10-billion loan, increasing Petrobras's exports to China, and partnerships between Petrobras and Chinese companies in Brazil's oil fields.

The Chinese state companies have pursued both their own corporate agendas and the broader state goal of securing scarce resources, said Erica Downs, a China specialist at the Brookings Institute in Washington, D.C., and former analyst with the Central Intelligence Agency.

“Both the government and the companies are seizing opportunity in crisis,” Ms. Downs said. “But I don't see what they have been doing in the wake of the economic crisis to secure energy supplies abroad as posing a direct threat to U.S. interests.”

She added, however, that the deepening Chinese involvement in energy-rich regions such as Central Asia, Iran and Africa do have geopolitical repercussions, which is reshaping power relationships across the world.

Chinese companies have been more comfortable doing business in the developing world, where political elites often prefer Chinese to Western oil giants, in contrast to the deep suspicions that often greet the Asian firms in the developed world.

With the current thaw in Sino-Canadian relations, many analyst are expecting the Chinese companies to take a closer look at the oil sands. While political tensions have been a barrier, the Asian firms also were reluctant to invest in Alberta projects because of high costs and lack of export opportunities to the West Coast.

Sinopec, which owns a half stake in the long-stalled Northern Lights oil sands project, has been the most active Canadian investor as it seeks to expand its upstream business.

Wenran Jiang, a University of Alberta professor with close ties to Chinese firms, said oil companies around the world are looking for investment from the Asian giants. But so far, he said, Canadian-based firms are more likely to sell offshore assets to the Chinese than their domestic holdings.

Costs in oil sands remain high compared with many regions in the world, and Chinese firms still see the political climate as risky, Mr. Jiang said.

“The Chinese have so many options of buying conventional oil assets around the world, they don't have to come to buy our oil sands assets,” he said. “There are so many opportunities around the world and many countries want to lure the dragon.”


Oilsandstruth.org is not associated with any other web site or organization. Please contact us regarding the use of any materials on this site.

Tar Sands Photo Albums by Project

Discussion Points on a Moratorium

User login


Syndicate content