The oil sector’s real growth story - China

- Editor


China and Russia have signed a multi-billion-dollar, intergovernmental agreement to construct an oil line from Russia that will supply oil directly to China. The seven agreements in one are worth trillions of dollars - including a 20-year oil contract to pump Russian oil to the Chinese market. In return, China has agreed to provide a total of $25 billion in loans to Russian oil companies Transneft and OAO Rosneft Oil Co. China also gets a cut of Rosneft’s production, as part of the deal.

In Africa, China’s CNOOC Ltd. and Sinopec Shanghai Petrochemical Co. are teaming up to buy a $1.3 billion stake in Angolan offshore development rights from US-based Marathon Oil Corp. A key point of note: Angola has recently overtaken Nigeria as Africa’s biggest oil producer.

The Wall Street Journal reported earlier this month that China National Petroleum Corp. (CNPC) is interested in buying all or a part of Argentina’s YPF SA for $14.5 billion.

Reports continue to circulate that CNPC will be taking the majority stake in Iraq’s Rumaila oilfield from BP. Rumaila is Iraq’s biggest oil field, producing more than a million barrels of crude oil per day.

China has become quite chummy with Brazil’s Petroleo Brasileiro (NYSE ADR: PBR). Petrobras is developing a huge new offshore field - one of the biggest new discoveries in decades, in fact - and any deal would include a production-supply agreement.

Three key catalysts behind these deals:

1. Nervous Reserves: China is sitting on the world’s largest pile of cash - more than US$2.3 trillion by some estimates. With an estimated 70% of that, or about US$1.61 trillion, there is no question it’s a huge source of financial firepower at a time when global markets are uncertain, if not weak. But it’s also a liability. China can’t diminish its high-concentration of greenback holdings without pushing the dollar off a cliff. So buying oil is a great way for China to diversify its reserves without kneecapping poor old Uncle Sam.

2. Those Not-So-Free “Free” Markets: China has less faith in the “free” markets than the West does. Ironically, the United States and other Western powers are partly to blame for Beijing’s free-market skepticism. For instance, not only did the United States slam the door in China’s face when China tried to buy Unocal Corp. (now part of Chevron Corp.)  a few years ago, but when former US President George W. Bush invaded Iraq, the war summarily cut off China’s ability to source oil from that Middle East member of the OPEC 12 (Organization of Oil Producing & Exporting Countries). Prior to the invasion, Beijing really didn’t consider the need to diversify China’s foreign-oil sources so US military action prompted their economic reaction. Now the genie’s out of the bottle.

3. Peerless Perspective: China’s leaders know that they must lock up oil supplies at a time when the Western world can’t seemingly be bothered to understand that this is a zero-sum game. China views the global financial crisis as an opportunity to be exploited for economic gain and the security of its people, not as a problem to be solved. China understands the big picture, and even though we apparently painted it, the West doesn’t.  By scouring the earth for oil at a time when the West is hamstrung by the global financial crisis, not only is China able to strike more favourable deals at more favourable prices, but it’s locking up huge supplies of commodities for its own use for years, even decades, to come. In doing so these resources are no longer available for use in the United States -which has major supply and pricing implications for this market.

Bamboozled by the Western media - which has perpetuated the “global-recession-means-lower-demand” story - it simply hasn’t dawned on most people here in the West that China doesn’t care about the major long-term impact this global buying spree will have on the US economy.

While the recession is definitely dampening US’s use of oil and gasoline, China’s oil demand is growing by more than 20% a year. Of the 8 million barrels a day that China already uses, half comes from imports. This means that China must lock up as many significant external supplies oil as possible right now and must accelerate its domestic exploration-and-processing efforts at warp speed.

This is not a static situation. China’s auto market is growing by 50% a year. It’s already the world’s largest, having passed the United States earlier this year. China may have more cars on its roads in the next 20 years than all those currently in the US. China’s never known high prices and its consumers haven’t either. China does not care what “price” is posted at the pump.

China understands its need for continual economic progress - as well as the role oil has to play to make that a reality. China is doing whatever it takes to guarantee future supplies, including structuring deals in ways that have caught Western companies by surprise. For instance, China’s companies are looking at how they can get a deal done by giving the other party something it actually needs. Moreover, in a move that’s as frustrating to Western leaders as it is surprising, many of these deals come with no strings attached.

One might want to conclude that China’s already got this one wrapped up and that “any resistance is futile.” However while China’s grown by leaps and bounds in terms of its financial sophistication when it comes to these deals, the country still lacks the relative exploration-and-production technology to go after the deep-water reserves and complicated fields where most of the still-undiscovered oil remains. Those are also the same kinds of locations where natural gas may be the better bet.

This suggests that investments in both sectors - including deep-water drillers and companies that specialise in natural-gas liquification -may pay off for investors anxious to dine with the Chinese!

The global economic recovery is forecast to create an estimated $300 trillion worth of global-investing-profit opportunities.