China's thirst for oil

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China's thirst for oil China is turning to western investors to meet the demands of its fast-growing economy, writes Richard Mcgregor

Published: September 25 2000 18:57GMT | Last Updated: September 25 2000 19:03GMT

Since becoming a net oil importer seven years ago, China has tried hard to secure energy for its growing economy. Its military has staked out claims in the surrounding seas; its diplomats have traded arms-for-oil in the Middle East; and its economic bureaucrats have purchased output from fields from Iraq to Venezuela.

Now, with next month's $3.8bn overseas listing of the China Petrochemical Corporation, or Sinopec, Beijing's energy policy has taken a new turn. Along with two other large public offerings by state-owned oil companies, the Sinopec privatisation represents an unequivocal declaration that China's future energy needs will in large part be met by global markets.

Chinese oil companies are more interested than ever in obtaining crude at a lower cost, both by cutting the cost of domestic production and taking advantage of diverse sources in the global market. "The IPOs represent an unprecedented change in the Chinese economy and a milestone in the country's enterprise reform," says George Gilboy, who represents Cambridge Energy Research Associates in Beijing.

The privatisation policy has already won a vote of confidence from the world's big three oil companies - Exxon Mobil, BP Amoco and Royal Dutch/Shell - which have collectively committed $1.8bn to the float of Sinopec, a refining and petrochemical giant which serves the energy-intensive heartland of the economy in southern China.

Earlier this year, BP Amoco bought into the float of Petrochina, an upstream production company based mainly in the oil-rich north and western regions. The oil majors are also being wooed to take part in an overseas listing planned for the China National Offshore Oil Corporation (CNOOC), a group devoted to offshore exploration.

The creation of these three companies, divided broadly by industrial function, underlines the change in Beijing's thinking since 1993, when China's rapid economic development first outstripped its domestic production.

China's first response to a looming oil shortage, however, was not to put itself at the mercy of the market. Since the mid-1990s, Beijing has signed a number of oilfield development deals with Kazakhstan, Venezuela and Iraq worth $5.6bn, sometimes outbidding competitors by more than 40 per cent to purchase the rights.

It has also aggressively staked out its maritime rights, as far south as the disputed Spratley Islands, north of the Philippines, and the potentially rich Natuna gas fields at the northern tip of the Indonesian archipelago.

However, the government and its advisory bodies have consistently underestimated oil demand. Cera estimates that by 2010, the country will import just over 50 per cent of its oil, or about 3.7m barrels a day, compared with about 25 per cent of its oil today. Cera's estimates of overall demand exceed Beijing's by about 1m barrels a day. But in many respects, the consultancy's import projections are conservative since its forecasts for local production are relatively optimistic.

"We see the reforms and the IPOs of the large oil companies as having a positive effect on China's ability to produce domestic oil, partly because it will encourage further foreign investment in the form of partnerships, but most importantly because it really has changed the orientation of these Chinese firms themselves," says Mr Gilboy. "They are becoming commercially oriented firms, aiming to become more efficient and more profitable."

Not everybody is so upbeat about China's ability to maintain its present level of domestic production of 3.28m barrels a day, sourced from a patchwork of up to 350 fields.

"China had counted for a long time on a rapid expansion of its western oil fields. I think they have been disap pointed," argues Professor Bruce Esposito of the University of Hartford, who edited a Chinese energy newsletter.

The share of oil in China's energy mix is also growing, from 18 per cent of primary energy demand in 1990, to 21 per cent now and an estimated 27 per cent in 2010. Coal, which is abundant in China, will remain the main energy source for the foreseeable future. Liquid natural gas is the fastest growing segment of the market, expected to go from about zero to 7 per cent by 2010.

With China's imminent entry into the World Trade Organisation poised to expose the country to global market, the oil privatisations have been matched by a move to international parity pricing over the past year, a policy that has produced tense moments for Chinese leaders. Beijing's taxi-drivers staged a short strike in July to protest against rising fuel prices. The city government quickly responded by offering drivers a small monthly subsidy.

One foreign oil industry executive describes the privatisations as an "evolution" rather than a revolution in policy. "It has been a long time coming - the energy sector is always viewed as critical to a nation's security, and it has been tough gaining access," he says.

But change, though slow, may be far-reaching. Exxon Mobile, for example, is negotiating with Sinopec to establish 500 co-branded service stations, mostly in southern China.

The political impact could also be significant. The Chinese oil companies, and their commercial interests, are likely to develop an increasingly independent voice in internal debates with other stakeholders, such as the economic planning agencies, the military and the foreign ministry.

If they are to retain the support of global investors, they will have to operate as real companies and not as extensions of government. "I think there is a very strong likelihood that China will come to see its energy security in a way that is consistent with other oil-consuming countries - that strategies for security should be based on the market and diversification," says Mr Gilboy. "And that includes not so much control over resources, but access to them."

http://markets.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3SQMBHKDC&live=true

-- Martin Thompson (mthom1927@aol.com), September 25, 2000


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