See discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/228638628
The Overseas Activities of China's National Oil Companies: Rationale and
Outlook
Article in Minerals and Energy - Raw Materials Report · March 2006
DOI: 10.1080/14041040500504343
CITATIONS
READS
25
781
2 authors, including:
Philip Andrews-Speed
National University of Singapore
126 PUBLICATIONS 1,238 CITATIONS
SEE PROFILE
Some of the authors of this publication are also working on these related projects:
Policy and Law for Nuclear Safety and Security View project
All content following this page was uploaded by Philip Andrews-Speed on 16 April 2014.
The user has requested enhancement of the downloaded file.
2006; 1:17–30
The Overseas Activities of China’s
National Oil Companies: Rationale
and Outlook
by XIN MA and PHILIP ANDREWS-SPEED
Centre for Energy, Petroleum and Mineral Law and Policy, University of Dundee, Dundee, UK
Abstract
The rapid expansion of the overseas
activities of China’s national oil companies (NOCs) has been driven by
the needs of both government and
NOCs, and this partnership has provoked negative reactions in some
other oil importing countries. One
goal the government and companies
share is to acquire overseas production of oil and gas. In the late 1990s
China’s government worked closely
with the NOCs to gain access to
projects of strategic importance.
Since 2002 the link between the
government and the NOCs has loosened perceptively, at least in those
countries which lack a strategic significance. The NOCs are behaving
more like private sector companies,
but still have much to learn,
INTRODUCTION
Since their first tentative steps into the international arena in the early 1990s, China’s national
oil companies (NOCs) have expanded their overseas activities with great speed and determination.
In many respects they are following a pattern set in
the 1980s by companies from such countries as
Japan, Brazil, Malaysia and Norway, and more
recently from India. Indeed, links between governments and oil companies have existed, albeit with
varying degrees of strength, for 100 years or more.
Even in the absence of a national oil company,
some governments have sought use their influence
to protect their nation’s oil companies and to
enhance the security of oil supply. An example is
the USA’s Mandatory Oil Import Control Program
launched in 1958 (Taverne, 1995).
Certain features of the Chinese activities appear to
be distinct. The speed with which the activity has
grown, the number and geographic distribution of
the projects, the scale of available funds and the
number of Chinese NOCs involved have resulted in
a greater impact on the international petroleum
industry itself. Further, the close involvement of
China’s government in some of the projects, the
# 2006 Taylor & Francis ISSN 1404–1049
DOI 10.1080/14041040500504343
especially with respect to the assessment and evaluation of risk. In the
absence of a domestic crisis or a series
of commercial failures, it is almost
certain that China’s NOCs will continue their overseas expansion.
Attempts to obstruct this spread may
be counter-productive. Partnership
rather than confrontation will prove
to be more constructive.
frequency with which petroleum projects are
integrated into a wider package of economic and
political deals, and the political nature of some of
the host governments has triggered a wide range of
political and strategic concerns. These are exacerbated by the perceived international political ambitions of China’s government and the country’s
history as a Communist state.
As a consequence, the overseas investments of
China’s NOCs have resulted in a considerable
amount of hostile comment in the political sphere
and apprehension in the industry. A recent
example of this was the attempted take-over of
Unocal by China National Offshore Oil
Corporation (CNOOC) in the summer of 2005
which was blocked by the US Congress. On one
side the Chinese company claimed that they
were following normal international business
practices but were being unfairly obstructed by
the US government and companies. On the
other side, government and company officials,
elected representatives and scholars were arguing
that CNOOC was an agent of the Chinese
government seeking to acquire oil and gas reserves
to enhance national security to the detriment of
US interests.
MINERALS & ENERGY VOL 21 NO 1 2006
17
X. Ma and P. Andrews-Speed
This lack of understanding of the context and
motivations of the overseas activities of China’s
NOCs has the potential to disrupt the flow of
business in the international oil and gas industry
by undermining trust between the Chinese government and NOCs on the one hand and the
governments and oil companies of other countries
on the other. This danger is exacerbated by the
failure of the senior management of the Chinese
NOCs to appreciate how their companies’ activities are perceived by many in the west.
The aim of this paper is to explore the driving
forces and the rationale behind the expanding
overseas activities of China’s NOCs, and in particular to distinguish the respective motivations and
roles of government and NOCs. The paper starts
with an examination of these driving forces before
an evaluation of the apparent strategy for these
overseas activities. The paper concludes by outlining
the prospects for the future and the implications for
the international oil and gas industry.
DRIVERS FOR OVERSEAS ACTIVITIES
China’s Energy Challenge and Policy Response
The underlying reason for China’s outward looking strategy for oil and gas lies in the growing
import requirement for these commodities. The
growing demand for petroleum has outstripped
the nation’s ability to expand production and the
import requirement is set to grow for the foreseeable future. The country became a net importer of
oil in1994 and will start to import gas in 2006 or
2007. By 2020 China’s annual net imports of oil
may amount to 350 million tonnes per year
(International Energy Agency, 2004), up from 150
million tonnes in 2004. Imports of natural gas
could exceed 50 billion cubic metres per year by
2020 (Andrews-Speed, 2004).
This increasing import requirement has been
seen by the government as a serious threat to
security of energy supply. As a result they have
implemented a series of measures designed to
enhance security of supply. On the domestic front
these include maximizing production of oil and
gas, expanding and upgrading the capacity of
domestic oil refineries, constructing emergency oil
storage, reducing the use of oil in power generation, and investing in coal-to-liquids technology.
Rather less attention has been directed at energy
efficiency and energy pricing, though a number of
announcements and initiatives launched since
2004 indicate that this may be changing. In the
18
MINERALS & ENERGY VOL 21 NO 1 2006
international arena, the government has sought
to diversify sources of oil imports, to build
infrastructure to support the importation of oil
and gas by sea and overland, to develop closer
political relations with key suppliers and to secure
sea-lanes of communication (International Energy
Agency, 2000; Andrews-Speed et al., 2002; Downs,
2002; Jaffe and Lewis, 2002).
This approach to security of energy supply may be
characterized as being ‘‘strategic’’ (Andrews-Speed et
al., 2002). Direct government involvement, in part
through state-owned companies, is preferred to
reliance on market mechanisms. While this contrasts with the ‘‘market’’ approach proclaimed by a
number of western governments, China’s overall
strategy has two key advantages for the country.
First, it is more consistent with the current manner
in which the domestic energy sector is managed,
with the dominance of state-owned companies, the
tight government control over consumer prices and
the lack of experience of international energy
markets. Secondly, events in the past few years have
revealed a number of deficiencies within energy
markets for addressing both short-term and longterm threats to security of energy supply. These
include significant and widespread power outages
in North America and Europe, as well as a potential
shortfall of gas supply in the United Kingdom in the
winter of 2005–2006.
China’s ‘‘strategic’’ approach to security of oil
and gas supply has provided the background for
the overseas activities of its NOCs. However, the
drivers for these activities extend far beyond
security of supply concerns, and this becomes
especially apparent by distinguishing the separate
motivations of the government and the NOCs.
Government Drivers
Four strands may be identified in the government’s
encouragement of the NOC’s overseas activities:
energy policy, industrial policy, social policy, and
foreign policy. Of these, the most important has
been energy policy.
The essence of the government’s approach to
security of oil and gas supply is captured by the
phrase ‘‘two markets, two resources’’.1 This identifies the need to engage with both domestic and
overseas markets for energy products and to
exploit primary resources both within China and
overseas. The rationale for purchasing more oil
and gas from the international markets and to
diversify these sources is self-evident, as this
Overseas Activities of China’s Oil Companies
strategy increases supplies at the same time as
diversifying supply risk. The reasoning behind the
investment in overseas oil and gas reserves is less
clear.
In the late 1990s, when the issue of security of
supply started to climb the government’s policy
agenda, documents issued by government departments, think- tanks and academics were muddled
and ambiguous with respect to clearly identifying
the tangible benefits of security of supply of
overseas investment by the NOCs (AndrewsSpeed et al., 2002). However recent years have
seen some clearer statements of perceived potential gains.
The long-standing driver has been the idea that
a proportion of the resource in a field in which a
Chinese NOC owned a share was essentially a
‘‘Chinese’’ resource, and that oil or gas produced
could be shipped to China in times of a crisis. This
rationale does not bear close scrutiny for two
reasons. First, in a real supply crisis it may not be
possible to transport the oil to China. However,
this constraint can be avoided by putting in place
oil-swap arrangements. Secondly, progressive privatisation of the NOCs might reduce the government’s ability to control their behaviour.
Two further strands of logic have been expressed.
The first is based on the widely-held view that
world oil and gas reserves are limited and that
production will start to decline irrevocably at some
time in the future, probably during the current
century. Imminent decline will trigger competition
for access to these resources not only between
companies but also among the energy importing
nations. It is therefore seen as necessary that China,
a latecomer in the international petroleum arena,
hastens to establish its hold over a significant
quantity of resources (Shu and Li, 2004).
The second line of thinking is more short-term
in nature, and recognizes that it is not necessarily
in the interests of the NOCs to ship their overseas
oil and gas production back to China. Despite this
lack of flow of petroleum, there will be a flow of
foreign exchange earnings which can contribute to
the ability of both the government and the NOCs
to buy oil and gas on the international markets
(Ren, 2004). The increased level of profits flowing
to the NOCs and of tax revenues flowing to the
government will, in principle, further dampen the
impact of high oil prices on the national economy.
The process of reforming China’s state-owned
enterprises (SOEs) has lain at the heart of China’s
industrial policy since the early 1980s. It began
with the delegation of management responsibilities, and was followed by corporatisation and, in
many cases, privatisation. The process was intensified in 1997, but with the proviso of ‘‘retaining
the large and releasing the small’’ (Green and Liu,
2005). This meant that most small- and mediumsized companies were to be relieved of state
ownership, while large SOEs, especially those in
what were perceived to be capital-intensive ‘‘pillar
industries’’ were to remain in state hands
(Steinfeld, 2002). Further, the major SOEs were
to be actively encouraged to become major players
on the international stage (Nolan, 2001).
Petroleum, indeed energy as a whole, is seen as
a pillar industry and energy companies remain
largely in state hands. The government has
allowed the petroleum companies to maintain
predominance in all parts of the domestic oil and
gas market, albeit not total monopoly power
(Andrews-Speed and Cao, 2005). Indeed, the
petroleum companies continue to retain a privileged position in China, both economically and
politically, for most Chief Executives of NOCs are
still promoted to senior political positions in the
government or in the Party.
The reorganisation of the NOCs in 1998 and the
subsequent initial public offerings (IPOs) were
seen as first steps to their emergence from state
control and from their focus on purely national
resources (Zhang, 2004). Internationalization
became a key part of government industrial
strategy for the NOCs. China’s petroleum companies have decades of experience and have built up
substantial technical and managerial expertise,
albeit restricted to the domestic market. In this
respect they start with many advantages over
Japan’s oil companies when they stepped onto
the world stage in the 1980s. Overseas investment
by the Chinese NOCs in their core business of
exploration and production would not only allow
them to become players in the global economy
but would also provide opportunities to support
the internationalization of China’s large petroleum service industry.
The success of China’s NOCs is not just a
matter of national prestige, but also of tax
revenue, for the NOCs contribute some 25% of
the fiscal income for China’s central government.2
If they can apply their expertise successfully in
the international arena, these tax revenues should
rise.
MINERALS & ENERGY VOL 21 NO 1 2006
19
X. Ma and P. Andrews-Speed
This component of industrial policy would also
support an important dimension of socio-economic
policy. The threat of growing unemployment or
under-employment has long been a major economic
and political challenge for China’s government, but
this has been exacerbated by the acceleration of SOE
reform since the late 1990s and subsequent lay-offs
of millions of workers (Naughton, 1999). The NOCs
still employ hundreds of thousands of people,
despite massive reductions in staffing levels.
Expansion and success on the international stage
of both the NOCs and the service companies makes
a significant contribution to providing gainful
employment, despite ongoing forced redundancies
in the domestic subsidiaries of these corporations.
The fourth set of drivers for the government
support of the NOCs’ overseas activities relates to
foreign policy. Many of the world’s energy
exporting regions are of direct or indirect strategic
concern to China as it seeks to ensure its national
security by enhancing political stability in its
region and by raising its political profile in the
international arena. For this reason, China’s
energy initiatives in Russia, central Asia and east
Asia have a very strong political flavour as
enhancing the security in this region is a high
priority for the government (Andrews-Speed et al.,
2002). Further, energy activities in the Middle
East, Africa and Latin America, though primarily
driven by energy concerns in most cases, provide
the opportunity for China to extend its sphere of
political influence (Jaffe and Lewis, 2002).
Corporate Drivers
During the last ten years, China’s NOCs have been
subjected to substantial reforms as part of the wider
programme of SOE reform described in the previous
section. During the three years 1998–2000 the main
NOCs were restructured, corporatised, commercialised and partially privatised. As a result these
corporations are now much more autonomous
and commercially-driven than before.
China’s oil and gas industry is dominated by
three companies. The two largest are China
National Petroleum Corporation (CNPC) and
China National Petrochemical Corporation
(Sinopec), both of which are vertically integrated
companies. Most of CNPC’s domestic assets are
upstream and most of Sinopec’s downstream.
PetroChina Ltd and Sinopec Ltd were then created,
assigned the productive domestic assets, and
partially privatised through IPOs on international
20
MINERALS & ENERGY VOL 21 NO 1 2006
stock markets. CNPC and Sinopec, respectively,
remained as wholly-government-owned corporations with the less productive assets and noncommercial responsibilities.
The China National Offshore Oil Corporation
(CNOOC) underwent a similar commercialisation
process which spawned CNOOC Ltd, a company
much smaller than PetroChina Ltd or Sinopec Ltd,
and with assets restricted almost entirely to
offshore exploration and production.
Other players include the trading company,
Sinochem Corporation, a large number of petroleum service companies mainly owned by the parent
NOCs such as CNPC, oil supply companies such as
China Aviation Oil, the China Export and Credit
Insurance Company (Sinosure), and the China
International Trust and Investment Corporation
(CITIC).
Though each company has its own specific
motivations, the drivers for China’s major NOCs
relate principally to corporate survival and corporate ambition for exparesion. Underlying both is
the fact that China’s primary oil and gas resources
are limited and of poor quality and modest size by
international standards (Andrews-Speed, 2004).
Long-term corporate survival requires the NOCs to
expand their upstream activities overseas, in order
to grow their reserves, their business and their
revenues. It is seen as necessary for them to act
promptly to gain access to overseas assets, thus
gaining a position in the international exploration
and production business, in order to secure their
long-term future. In places the Chinese NOCs
even compete against each other (Shu and Li,
2004; Wu and Han, 2005).
In addition to the specific corporate needs, the
NOCs are receiving direct pressure and encouragement from the government to secure overseas oil
and gas assets in order to support the government’s
energy security strategy. Indeed, it may also be the
case that the NOCs are using the government’s
strategy as a lever to gain government support,
when it is required (Andrews-Speed et al., 2002).
A further incentive to expand abroad as rapidly as
possible may derive from an appreciation by the
management of the NOCs that their strong commercial and political position at home may not last
indefinitely. Obligations under WTO will progressively oblige the government to open part of the
petroleum sector to international players. Further
reform of the domestic petroleum industry might
enhance the degree of competition and increase the
Overseas Activities of China’s Oil Companies
degree of private ownership which in turn would
undermine the inherent market strength of the
NOCs. As a result, the state banks may be less
inclined to grant them loans, especially if the banks
themselves continue to undergo reform. Further, the
progressive withdrawal of the government from the
affairs of the NOCs could reduce the level of political
support the NOCs receive.
These considerations, combined with the current high levels of oil prices, have resulted in
China’s NOCs facing a window of opportunity of
uncertain duration, during which they can expand
their overseas activity with little constraint.
Pure expansion by itself is not sufficient.
Corporatisation, commercialisation and partial privatisation have provided some incentive to enhance
profits as well as simply revenues, and it is likely that
the pressure to increase commercial performance
will grow. Though the Chinese NOCs have substantial expertise built up over decades of business
within China, their international experience is
limited to no more than 15 years. The NOCs have
recognized the need to enhance their management
and technical skills. The IPOs provided the opportunity of working closely with international banks,
law firms, accounting firms and consultants of the
highest calibre, as well as with strategic partners from
the international oil industry such as Shell and BP.
However, nothing can replace experience. The NOC
management clearly recognizes this and is determined to use the ongoing projects as a rapid learning
experience to raise their performance to the level of
the major international oil companies (Liu, 2005).
Despite the apparent convergence of interests
between the government and the NOCs, a fundamental tension exists between the long-term requirement of the NOCs to generate profits and the
government’s desire to secure energy supplies, to
generate employment, to maximise tax revenue and
to use the NOCs as international political tools. In
addition, China’s NOCs are starting to discover that
having the explicit backing of the government can be
as much an obstacle as a benefit when seeking
overseas opportunities. The main argument used by
opponents of CNOOC’s proposed take-over of
Unocal was that CNOOC Ltd was an agent of the
government. Within a few months the Chief
Executive of CNOOC Ltd had raised the issue of
the government further reducing its holding in the
company (McGregor and Guerrera, 2005).
THE OVERSEAS ACTIVITIES
General Nature of the Activity
The overseas activities of China’s NOCs are diverse
and widespread (Table 1). They encompass
upstream, midstream and downstream, as well as
oil import and service provision. Despite the apparently random nature of this behaviour, a distinct
historical pattern with three stages may be identified
(Liu, 2005): 1992–1997, 1997–2002, 2002–present.
From 1992 to 1997 the internationalization was
undertaken almost exclusively by CNPC. It acquired
small assets which generally required field development, rehabilitation and production. These were
geographically diverse and included Peru, Canada
Table 1. Summary of the Main Overseas Projects of China’s National Oil Companies.
Region
African
Country
Project
nature
Oil export to
China 2004
(‘000 tonnes)
Algeria
E,DP,R,S
676
Angola
Chad
Egypt
Gabon
Libya
Mauritania
Morocco
Niger
Nigeria*
P
E
E,DP, S
E, CS
S
E,DP
E
E
E,DP, S, CS
16,208
Sudan*
Tunisia
E,DP,R,S,PP
E, E(g)
5,770
548
1,338
1,489
Chinese NOC
involvement
CNPC, Sinopec,
CNOOC
CNPC
Sinopec
Sinopec
CNPC
CNPC
CNPC
CNPC
CNPC, Sinopec,
Sinosure, CNOOC
CNPC, Sinopec
Sinochem
MINERALS & ENERGY VOL 21 NO 1 2006
21
X. Ma and P. Andrews-Speed
(Continued.)
Region
Country
Middle East
S & E Asia/
Australasia
Americas
FSU
Project
nature
Oil export to
China 2004
(‘000 tonnes)
Chinese NOC
involvement
1,306
CNPC, Sinochem,
others
CNPC, Sinopec
Sinopec
CNOC, Sinopec,
Sinochem
Sinopec, Sinochem,
others
CNPC
Sinochem
Sinopec
CNOOC
Sinopec
CNPC/Petrochina,
CNOOC, Sinopec
and others
CAO
Others
CNPC, Sinopec
CPECC
CNPC, Citic
Iraq
DP,CS
Iran*
Kuwait
Oman
E, DP,S,CS
P
E(g),DP, DP(g)
13,237
1,254
16,347
Saudi Arabia
E(g),D(g),S,CS (g)
17,244
Syria
UAE*
Yemen
Australia
Brunei
Indonesia*
DP,S
P(g)
E,DP, DP(g)
CS(g),E(g), DP(g)
CS
E,E(g),DP,
DP(g),R,CS(g)
1,343
4,912
1,510
882
3,428
Hong Kong
Mongolia
Myanmar*
Pakistan
Papua New
Guinea*
Philippines
Singapore*
Taiwan
Thailand
Brazil*
Canada
O
S,P,R
E, E(g), DP
S
E
E
R
E
DP
E, P, CS
DP,P (oil sand)
Cuba
Ecuador
E, DP
E,DP, PP, S
Peru
US
Venezuela*
Azerbaijan*
Kazakhstan*
DP, DP(g)
P
E,CS,DP
E,S, DP, DP (g)
CS(g),E,DP,PP,S
Kyrgyzstan
Russia*
Turkmenistan
Uzbekistan*
R
CS, PP
S
D,S
1,576
334
1,285
10,776
CNOOC
CAO
CNOOC
CNPC
CNPC, Sinopec
CNPC/PetroChina,
Sinopec, CNOOC
Sinopec
CNPC/PetroChina,
Sinopec, Sinochem
CNPC
CNOOC
CNPC
CNPC, Sinopec
CNPC/Petrochina,
Sinopec
CNPC, Sinopec
CNPC
CNPC, others
Explanation: E: Exploration; DP: Development and Production; P: Production; R: Refinery; PP: Pipeline; CS: Oil
Supply Contract; CS(g): Gas Supply Contract; S: Service Contract; O: others; (g): gas.
* Countries included in China’s Guidance Catalogue of Countries and Industries for Overseas Investment in Oil and
Gas (8th July 2004)
and Thailand, with a single exploration block in
Papua New Guinea. The aim was to increase
familiarity with the international operating environment, gain experience and develop skills.
22
MINERALS & ENERGY VOL 21 NO 1 2006
The year 1997 saw a significant change in
behaviour. For the first time CNPC invested in
development projects which had a high probability of yielding large quantities of oil.
Overseas Activities of China’s Oil Companies
Substantial exploration assets began to be
acquired and geographic priorities were becoming
apparent. The three years 1997 to 1999 saw
Chinese NOCs taking positions in major oil
producing countries such as Kazakhstan,
Venezuela, Nigeria, Kuwait and Egypt, as well as
more politically contentious deals in Sudan, Iran
and Iraq. Again most of these initiatives were
taken by CNPC. Of particular note were the
agreements in Sudan and Kazakhstan which were
to form the foundation for the first substantial
overseas production by a Chinese NOC. The deals
in Kazakhstan were part of a wider plan to import
oil, and eventually gas, directly from that country
to China by pipeline (Andrews-Speed et al., 2002;
Downs, 2002; Jaffe and Lewis, 2002).
The following years to 2002 saw a slowing of
activity, probably related to the low level of oil
prices, but the pattern of behaviour persisted with
a widening geographic scope to include Algeria,
Indonesia and Azerbaijan. Despite considerable
efforts on the part of both governments, no firm
contracts were signed by Chinese NOCs in Russia.
The contracts signed during the period 1997–
2002 were mainly directed at low risk, conventional, onshore projects in oil rich regions. The
government provided considerable support to the
NOCs, particularly to gain access to resources in
the petroleum-rich belt running from Russia,
through central Asia to the Middle East
(Andrews-Speed et al, 2002).
The third and current stage started in 2002, as
oil prices began their climb. This period was
characterized by a great increase in diversity in
many respects. First, Chinese NOCs other than
CNPC began a systematic search for overseas
assets. Secondly, the geographic scope of the
search expanded to include a large number of
countries in Africa and Latin America, as well as
nearer to home in south and east Asia, Australasia
and central Asia. Thirdly, the scale and nature of
the projects expanded to cover the full range of
petroleum activities, and the NOCs began to move
from the low risk, conventional projects to
unfamiliar projects involving deep-water exploration and the development of tar sands. For the first
time natural gas played a prominent role with
deals in Saudi Arabia, on the North-West Shelf of
Australia and in Indonesia.
A further characteristic of this third phase was
the increasing tendency to purchase stakes in
assets or suites of assets from existing players,
rather than by negotiation with governments.
Such acquisitions were made in strategic countries
such as Indonesia and Kazakhstan, as well as in
Peru, Tunisia and Canada. By 2003, CNPC/
PetroChina had already acquired proven recoverable reserves of oil amounting to 1.14 billion
tonnes and overseas equity production had
reached 13 million tonnes per year.3
The year 2005 saw a new boldness in strategy as
CNOOC attempted but failed to take over Unocal
with a bid valued at US $18.5 billion. Later the
same year CNPC appears to have succeeded in its
US $ 4.2 billion bid for PetroKazakhstan. Since
then there have been rumours that Sinopec is
planning a partnership with BP which might
involve a swap between some of Sinopec’s downstream assets in China for a share of some of BP’s
overseas upstream assets. At the same time rapid
progress is being made to complete the oil
pipeline from Kazakhstan to China, though plans
for a similar pipeline from Russia remain in
abeyance. Chinese petroleum service and construction companies continue their rapid expansion around the world, both in association with
the NOCs and independently.
CNPC/PetroChina, Sinopec, CNOOC and
Sinochem are now all active in the search for
exploration and production assets. CNPC/
PetroChina and CNOOC seek to expand their
existing proportionately large upstream asset base.
CNOOC seems particularly focused on south-east
Asia and Australasia. Sinopec needs to reduce its
dependence on the downstream sector in which
profits are particularly sensitive to China’s domestic pricing system for oil products, and will also be
seeking to have its own overseas crude oil
production to feeds it refineries. In the past
Sinochem’s business was almost exclusively
restricted to trading. In the year 2000 its management decided to move upstream and overseas in
order to survive as the other NOCs moved into its
core field of activity (Wu and Han, 2005).
As well as securing overseas assets, China’s
government has been working with the NOCs to
build close relations with major supplying governments and to diversify the sources of oil imports.
Total crude oil imports have risen ten-fold, from
123,000 tonnes per year in 1994 to 1.23 million
tonnes in 2004 (Figure 1). Most of this growth has
been sourced from the Middle East and from
Africa. The most prominent countries are shown
in Table 2. Of particular note is the recent increase
MINERALS & ENERGY VOL 21 NO 1 2006
23
X. Ma and P. Andrews-Speed
Figure 1. Crude Oil Imports to China, 1995–2004, in ‘000 Tonnes.
in importance of Saudi Arabia, Russia and Angola,
the decline in significance of Indonesia and
Oman, and the surge and subsequent decline in
proportional contribution from Sudan. Relative
dependence on the Middle East reached a peak of
61% in 1998, but this had been reduced to 45%
by 2004. Over the ten years to 2004, the number
of countries from which China imported crude oil
expanded from about less than 20 to more than
30 (Tian, 1999, 2005).
Bidding Behaviour
The accusation is often made of NOCs of any
country that they ‘‘overbid’’ and pay more for their
assets than the prevailing market price. Such
‘‘overbidding’’ normally takes the form of paying
substantially more than that offered by the
nearest party in a bidding round or in a negotiation, or otherwise paying more than the value of
an asset as perceived by the other parties. The
Chinese NOCs have been particularly prone to
Table 2. Crude Oil Imports to China for Selected Years 1995–2004, Showing Changing Proportions from Selected States and
Regions.
State and Region
Saudi Arabia
Oman
Iran
Yemen
Middle East total
Angola
Sudan
Congo
Equatorial Guinea
African Total
Vietnam
Indonesia
Malaysia
Australia
Asia Pacific Total
Russia
Norway
Brazil
Kazakhstan
European and Western Hemisphere
TOTAL
24
MINERALS & ENERGY VOL 21 NO 1 2006
1995
1998
2001
2004
2.0%
21.5%
5.5%
14.6%
45.8%
5.9%
0.0%
0.0%
0.0%
10.1%
4.5%
31.1%
3.5%
0.4%
41.8%
0.0%
0.0%
0.0%
0.0%
2.4%
100%
6.6%
21.2%
13.2%
14.8%
61.0%
4.0%
0.0%
1.4%
0.0%
8.0%
3.2%
12.5%
1.7%
1.3%
20.0%
0.0%
0.0%
0.0%
0.0%
11.0%
100.0%
14.6%
13.5%
18.0%
3.8%
56.2%
6.3%
8.3%
1.1%
3.6%
22.5%
5.6%
4.4%
1.5%
1.2%
14.4%
2.9%
1.5%
0.0%
1.1%
6.9%
100.0%
14.0%
13.3%
10.8%
4.0%
45.4%
13.2%
4.7%
3.9%
2.8%
28.7%
4.4%
2.8%
1.4%
1.2%
11.5%
8.8%
1.6%
1.3%
1.0%
14.3%
100.0%
Overseas Activities of China’s Oil Companies
this criticism, for example Kazakhstan and
Venezuela in 1997, as well as the failed Unocal
deal in 2005.
In the case of the Chinese NOCs, this behaviour
has a number of causes relating to their commercial world view, their strategy, their inexperience
and the role of government. Chinese NOCs, like
other NOCs, are not primarily answerable to
public shareholders with short time horizons.
They are not overwhelmed by fear of failure.
Indeed, they have not had to face major commercial crises. Thus they can afford, or think they can
afford, to take a more optimistic view of technical,
commercial and political risks. Indeed, close
support from the Chinese government may
indeed lower the political risk in some countries.
This lower level of perceived risk, combined with
access to loans from state-owned commercial
banks will result in China’s NOCs having a lower
cost of capital than international oil companies
(IOCs). At the same time the company may be
prepared to evaluate their projects with a higher
projected oil price than the more conservative
IOCs. What is not clear from the outside is which
examples of ‘‘overbidding’’ are the result of
deliberate strategy and which are the result of
inexperience.
Aside from this contrasting world view, the
strategy of the Chinese NOCs requires them to
acquire substantial assets in a relatively short
period of time, either by competing head on with
the IOCs and independent oil companies or by
seeking areas where the these other companies are
not active.
Where there is competition, the commercial
drive of the NOC combined, in some cases, with
active encouragement of the Chinese government
will necessarily involve in the Chinese NOC
paying a relatively high price to acquire the target
assets. This behaviour may be exacerbated in the
case of strategic assets such as those in Kazakhstan
which will feed the oil pipeline to China. In this
context the management of China’s NOCs may
regard it as necessary to pay an ‘‘entry fee’’ through
bidding high in order to ensure the success of their
strategy.
A further component of NOC strategy is the
need to learn as rapidly as possible. This can only
be achieved through experience. In this respect it is
noticeable that many of the more recent deals
signed involve the Chinese NOC taking a small
share in a consortium.
Wider Political and Economic Links
A final feature of the internationalization of
China’s NOCs has been the close association, in
certain cases, with other commercial and
political activities which would appear to have
been grouped by the Chinese and host governments into a package of deals of mutual benefit.
Whilst China is not alone in linking economics
and politics in their international initiatives,
the scope of some of these deals and the nature
of certain host governments highlight the close
link between the government and the NOCs in
regions considered to be of strategic significance to
China.
The determination of China’s government to
assist its NOCs in the acquisition of oil and gas
fields in Russia and Kazakhastan and to construct
import pipelines from these countries reflects a
convergence of strategic and energy interests. The
collapse of the Soviet Union posed an immediate
threat to regional stability. China was actively
involved in the creation of what is now known as
the Shanghai Cooperation Organization, a regional security cooperative involving five states from
the former Soviet Union. In addition to providing
much needed oil and, in the future, gas from
neighbouring states, the investment and trade in
petroleum provides vital underpinning to crucial
political and security partnerships (AndrewsSpeed et al., 2002).
China’s activities in the Middle East also span
economic, political and military fields (Downs,
2002). The government has expended considerable effort to establish relations with major oil
exporters, and has been prepared to defy international opinion by investing in ‘‘rogue states’’ such
as Iran and Sudan. Investment and oil trade has
developed in conjunction with the provision of oil
field services, wider construction services and
labour. Oil companies from the Middle East also
appear to be gaining preferential access to the
refining industry in China.
The last four years have seen a major expansion
of political and economic activity in both Africa
and Latin America. In addition to the desire to
gain access to petroleum reserves and exports,
common features of China’s ambitions on these
two continents include asserting a regional presence and persuading those governments which
still recognise Taipei to switch their allegiance to
Beijing (Jaffe and Lewis, 2002; Dumbaugh and
Sullivan, 2005).
MINERALS & ENERGY VOL 21 NO 1 2006
25
X. Ma and P. Andrews-Speed
China’s relations with African governments tend
to be further supplemented by military cooperation and aid. A prominent example is Angola
which has rapidly risen to a position of being the
third largest supplier of oil to China, despite its
distant location. The Chinese government has
provided US $2 billion of loans for reconstruction,
backed by a sizeable labour force. In contrast Latin
America is seen as a major market for Chinese
exports, as well as a source for a wide range of
industrial and agricultural commodities. Of particular concern to the US government is China’s
deepening involvement in Venezuela’s oil industry, for Venezuela has long been a major supplier
of oil to the USA.
Such examples of the association of petroleum
investments with wider economic, political and
diplomatic moves have been used by critics of
China’s NOCs to highlight the close relationship
between the NOCs and government. However, it
should be noted that the involvement of China’s
NOCs in countries where such a complex web of
deals are most strongly developed dates back to
the late 1990s when, as discussed above, the
government was indeed closely involved in working with the NOCs to help them gain access to
overseas assets in what were perceived to be
strategic countries – strategic from the perspective
of petroleum supply and strategic from the
perspective of national interest.
However a wide spectrum exists from countries
such as Sudan, Iran and Kazakhstan where the
involvement of government is very strong and
strategic in nature, through countries such as
Angola and Venezuela where the involvement of
government is significant, to a large number of
other states where China’s government plays
merely a supporting role. The more recent expansion and geographic diversification of NOC
activities may indeed receive tacit encouragement
from the Chinese government, but in most cases
there is little evidence to suggest that the government is doing other than support an initiative led
by the NOC, develop associated economic activities and provide a coordination role.
THE OUTLOOK FOR CHINA’S NOC’S OVERSEAS
ACTIVITIES
At present there are no signs that either the NOCs
or the Chinese government are changing their
approach and strategy for overseas petroleum
activities. For as long as the underlying motives
26
MINERALS & ENERGY VOL 21 NO 1 2006
exist it is likely that the NOCs will continue their
overseas expansion, in the same manner as they
have since 1997. In this scenario the government
will continue to work closely with the NOCs and
with host governments to secure imports and
productive assets in a small number of strategic
regions such as Russia, central Asia, the Middle
East and parts of Africa. Outside these regions the
NOCs will pursue their own strategies with
varying but generally less direct government
involvement.
A crucial factor to the future commercial success
of China’s NOCs is the speed with which they can
learn from experience, and this applies as much to
strategic decision-making at board level as to
management and technical performance within
each asset. Key challenges are the assessment of
political and commercial risk at a strategic level, as
well as the effective management of overseas
subsidiaries. Chinese NOCs have already suffered
a number of significant setbacks in these respects.
The failure of CNOOC to take over Unocal in
2005 and of CNPC in 2002 to acquire a
controlling stake in Russia’s Slavneft drew attention to the inexperience of the management of
China’s NOCs in assessing and managing political
risk. In particular the Boards of Directors had
clearly underestimated the domestic opposition to
the involvement of Chinese NOCs in the petroleum industries of the USA and Russia.
The assessment of commercial risk involves
understanding the ‘‘rules of the game’’ and the
commercial drivers in the international petroleum
industry. In 2003 Sinopec and CNOOC suffered a
major setback in their attempt to acquire BG’s
share of the Kashagan field in Kazakhstan. The
other consortium partners exercised their preemptive rights and successfully blocked the two
Chinese companies. Rather than gaining a foothold in one of the world’s largest oilfields outside
the Middle East, all the Chinese NOCs succeeding
in doing was setting a high price for the
consortium partners to pay British Gas.
A final example is the problems of China
Aviation Oil in 2005, through the poor financial
risk management in its Singapore subsidiary.
Losses amounting to US $550 million accumulated from the speculative trading of energy
derivatives on the Singapore Exchange as a result
of misreporting and poor risk control.
In the likely case that China’s NOCs learn
from their experience and rapidly improve their
Overseas Activities of China’s Oil Companies
management processes and decision-making, the
rate of asset acquisition is unlikely to continue
growing at the same rate over the next ten years.
Financial constraints and limited management
capacity, combined with growing experience,
should result in the NOCs being more selective
and rationalizing their portfolios to enhance
overall profitability.
Successful exploration outcomes, growth of
overseas production and an increasing level of
profits from overseas activities will boost the
confidence of China’s NOCs. Like the IOCs before
them, they are likely to seek further growth and
reserve replacement as much by corporate acquisition as through exploration or the purchase of
individual assets. Further, they are likely to deepen
their relationships with other major petroleum
companies, both IOCs and NOCs, in order to gain
access to assets and to technology and expertise.
This relatively optimistic scenario of continued
growth and gradual stabilization and rationalization could be interrupted by a number of events,
either internal or external.
Internal events relate to the country, China’s
government, or the NOCs. Any catastrophic
political or economic collapse within China could
have an immediate and detrimental impact on the
overseas activities of the NOCs. The need for oil
imports would decline, as would the availability of
investment capital. The attention of both government officials and NOC managers would be
diverted to managing the crisis at home rather
than further overseas expansion. The probability
of such a crisis within the next ten years is
relatively low. More likely is a period of relative
economic stagnation accompanied or possibly
triggered by problems in the banking sector,
which would similarly cause a decline in import
requirement and in the availability of funds.
A change of behaviour of the NOCs could also
be triggered by a change in government energy
policy with increased attention and resources
being devoted to energy conservation, energy
efficiency, coal-to-liquids and other measures to
constrain the import requirements for oil. Though
such a policy change is possible, it is unlikely to
have substantive impact on net import requirements over the next ten years.
A more likely change of government policy
would concern the ownership and structure of the
domestic petroleum industry, the nature of the
domestic market and the fiscal regime for the
NOCs. Moves which significantly reduced the
government shareholding in the NOCs, reduced
the entry barriers to new players in the domestic
market, or changed the financial relationship
between the government and the NOCs might
necessitate a radical strategic review on the part of
the companies.
The NOCs themselves could change their
strategy as a result of commercial pressures. As
discussed above, Chinese NOCs appear to have a
different approach to risk and risk management
from IOCs. With respect to conventional commercial and technical risks, either falling oil prices
or inexperience in investment decision-making
and project management could result in one of the
NOCs incurring substantial financial losses.
Without financial support from the government,
such losses would require the company to
rationalize its portfolio and reduce the level of
activity, at least in the short term.
A further consideration is the possibility of
increasing tension between the NOCs and the
Chinese government. In the 1990s the motivations and strategies of government and company
were closely aligned. In recent years, as described
above, the NOCs have been pursuing their own
goals with less reference to and less support from
the government. If the price of oil stays high and
the overseas ventures are successful, the NOCs will
become progressively less dependent on the
government and freer to pursue their agenda of
corporate expansion and profit growth. An
increasing proportion of revenues and profits will
be generated outside China, and opportunities to
reduce tax payments to the Chinese government
may increase.
The ability of government to influence the
investment decision-making of the NOCs may
decline. This could be with respect to choice of
country, choice of project and nature of project.
For example, the NOCs have made little effort to
date to acquire or construct large overseas refining
assets, with the exception of a failed bid for a
South Korean refinery in 2004. If an NOC decided
to invest in a refinery outside China and its
immediate region, this would undermine the
government’s strategy to refine most of its oil
requirements within China. In addition it would
reduce the incentive for that company to send its
oil production back to China.
A range of external risks also face the NOCs
as they continue their internationalization. The
MINERALS & ENERGY VOL 21 NO 1 2006
27
X. Ma and P. Andrews-Speed
greatest of these is political risk. The extensive and
dispersed nature of their assets could provide the
management of China’s NOCs with a serious
challenge of political risk management in the
future. A small number of failures could undermine the strategy of the management and the
reputation of the company.
Any NOC venturing overseas for the first time
will be necessarily naı̈ve in the assessment of
political risk. This has been clearly demonstrated
for Chinese NOCs in the cases of Unocal and
Slavneft outlined above, both of which occurred
in the process of attempting to gain an asset. Even
once an asset has been acquired and production
has started, the political risk persists. In certain
countries where China’s government has good
relations, it may be able to intervene on behalf of
the NOC to ameliorate the impact of an unfavourable decision by the host government; but the
success of such interventions cannot be guaranteed, nor, in the long-term the stability of the
intergovernmental relationship.
In many countries, the challenge for the
Chinese government and for the NOC is to
appreciate the need to understand the perceptions
of their activities held by the government or the
people, and to address these concerns. This need is
greatest in countries such as the USA, Japan, India
and South Korea which are also major net
importers of oil and gas, and which consider
China as a rival for a limited vital resource. These
tensions could be diminished by number of
means: for example, by the government working
as assiduously on its relations with oil importers
as it does with exporters; by the government
reducing its holding in the NOCs; and by the
NOCs themselves seeking cooperation with oil
companies from the importing countries.
In recent years the importance of environmental
protection and of relations with local communities has increased in most countries around the
world. The Chinese NOCs have the twin challenges of having to rapidly meet international
standards in environmental management and
having to manage relations between the local
community and the large Chinese work forces
contracted to the service and construction projects.
A substantial failure in either one of these fields
would damage both the relationship between the
NOC and the host government and the international reputation of the NOC, and possibly of all
of China’s NOCs. This in turn might limit the
28
MINERALS & ENERGY VOL 21 NO 1 2006
opportunities available to China’s NOCs, at least
in the short term.
CONCLUSIONS
A number of strands of logic underlie the rapidly
expanding activities of China’s NOCs. On the one
hand stands a range of government priorities
relating principally to energy security, as well as to
industrial, foreign and social policy. The very
nature of the internationalization of the NOCs has
led to China’s government seeking to use this
process to enhance both national security and its
international standing in a variety of ways.
However, the NOCs are becoming progressively
more commercially-driven and more willing and
able to act in their own interests. The motivations
of the NOCs are tied closely to the corporate need
to survive by growing outside of China as rapidly
as possible, and, if necessary, by paying a high
initial price to catalyse this expansion.
Each NOC would appear to have its own
specific motivations and be developing its own
approach to internationalization. To date CNPC/
PetroChina has been the most active. For all the
companies, the Middle East, Russia, central Asia
and south-east Asia are clearly regions of high
priority, and in many cases the NOCs work very
closely with government in order that the interests
of all parties are addressed. In most of the other
locations, the NOC appears to be taking the lead
in searching out and acquiring assets, and the
government plays a supporting role and later
develops complementary economic programmes.
Although China’s NOCs feel that they are
behaving like private-sector oil companies driven
by commercial incentives, the management has
been slow to recognize that the outside world
focuses on the continuing, albeit diminishing link
between the companies and the government.
While this relationship has helped the NOCs in
the past, it is starting to become more of a
constraint. The challenge for the government and
for the companies is how to loosen this tie
sufficiently in order to address the concerns of
other players in the international industry, without placing at risk both the financial future of the
NOCs and the energy security policy of the
Chinese government.
It is likely that China’s NOCs will continue to
expand their overseas investments for the foreseeable future, though the next few years may see a
period of rationalization of their portfolios, a
Overseas Activities of China’s Oil Companies
slowing down of the rate of investment and a
reduction of the tendency to ‘‘overbid’’.
Various threats exist to this favourable trend.
The most important of these relates to the market
structure and regulatory framework for the petroleum industry within China and to the ability of
the NOCs to effectively manage commercial,
political, environmental and social risks in their
overseas ventures. Such events could rapidly
undermine or constrain the internationalization
strategies of one or more of the NOCs.
In the absence of such setbacks, China’s NOCs
are therefore set to become increasingly important
and successful players in the international petroleum industry. They will compete against IOCs,
independent oil companies and NOCs from other
countries. In this respect they are indeed a
potential threat, particularly with their tendency
to ‘‘overbid’’. At the same time they will seek
partnerships with these same companies.
Partnerships with IOCs will have the objective of
acquiring management and technical experience
and skills, as well as gaining access to countries
with large reserves which lie mainly in the hands
of IOCs. Partnerships with other NOCs may arise
either from government initiatives or from the
absence of other suitable partners.
From the perspective of the governments of
petroleum importing countries, these activities
have benign and, possibly, threatening implications. If China’s NOCs and, indeed, NOCs from
other countries invest in petroleum production in
places where other oil companies cannot or do not
wish to go, this can only add to the sum of oil and
gas reaching international markets and alleviate
the current shortage of production capacity.
Whether some of these investments prove to be
a threat in the longer term will depend on the level
of reserves which China’s NOCs can acquire in
countries which have large reserves and, at the
same time, poor political relations with OECD
states. If the NOCs from China and other
countries gain a strong foothold in, for example,
Iran and Saudi Arabia, and if the link between the
governments and their NOCs remains close, then
much of this oil and gas could be shipped to
China and other countries in times of market
tightness, at the expense of the OECD nations.
The challenge for governments and oil companies from other oil importing states is to make a
balanced assessment of the implications of the
overseas activities of China’s NOCs. Focusing
attention solely on the threats to corporate or
national interests may undermine the effective
functioning of international oil markets and may
enhance China’s sense of energy insecurity. A
more open-minded approach would welcome the
arrival of the China’s NOCs on the international
stage and seek partnership with these companies
to mutual benefit.
Notes
1. ‘‘The central government’s economic working meeting on the establishment of the overall economic
tasks for the year 1997’’, The People’s Daily, 25th
November 1996, http://www.people.com.cn/GB/
channel5/21/20001201/333590.html (in Chinese.)
2. Ding, J.M. ‘‘Decipher the ranking of top 100 tax
payers in 2004 (China)’’, Xinhua News Agency, 11th
September 2005. www.Xinhuanet.cim/fortune/
200509/11/content_342845.htm (in Chinese.)
3. CNPC corporate website: www.cnpc.com.cn
References
Andrews-Speed, P. (2004) Energy Policy and
Regulation in China (The Hague: Kluwer Law
International).
Andrews-Speed, P., and Cao, Z. (2005) ‘‘Prospects
for privatisation in China’s energy sector’’. In: S.
Green, and G.S. Liu (Eds.) Exit the Dragon?
Privatization and State Ownership in China
(London: Royal Institute for International
Affairs) pp.196–213.
Andrews-Speed, P., Liao, X., and Dannreuther, R.
(2002) The Strategic Impact of China’s Energy
Needs (London, International Institute for
Strategic Studies) Adelphi Paper No. 346.
Downs, E.S. (2002) China’s Quest for Energy
Security (Santa Monica: RAND).
Dumbaugh, K., and Sullivan, M.P. (2005) China’s
Growing Interest in Latin America, CRS Report
for Congress, Library of Congress, 20th April
2005.
Green, S., and Liu, G.S. (2005) ‘‘China’s industrial
reform strategy: retreat and retain’’. In: S. Green,
and G.S. Liu (Eds.) Exit the dragon? Privatization
and State Ownership in China (London: Royal
Institute for International Affairs) pp.15–41.
International Energy Agency (2000) China’s
Worldwide Quest for Energy Security (Paris:
OECD/IEA).
International Energy Agency (2004) World Energy
Outlook (Paris: OECD/IEA).
Jaffe, A.M., and Lewis, S.W. (2002) ‘‘Beijing’s oil
diplomacy’’ Survival, 44 (1), pp. 115–134.
MINERALS & ENERGY VOL 21 NO 1 2006
29
X. Ma and P. Andrews-Speed
Liu, Q.R. (2005) ‘‘The improved approach of
Going Global by Chinese oil companies: interview with Liu Keyu, Zhang Weiping, Tong
Xiaoguang, Zhang Kang and Han Gensheng’’
International Petroleum Economics, 13 (3), pp.
25–29 (in Chinese).
McGregor, R., and Guerrera, F. (2005) ‘‘CNOOC
willing to ask Beijing to reduce stake’’, Financial
Times, 27th October, p.28.
Naughton, B. (1999) ‘‘China’s transition in
economic perspective’’. In: M. Goldman, and
R. MacFarquar (Eds.) The Paradox of China’s
Post-Mao Reforms (Cambridge, Mass: Harvard
University Press) pp. 30–44.
Nolan, P. (2001) China and the Global Business
Revolution (Basingstoke: Palgrave).
Ren, H.P. (2004) ‘‘The international petroleum
market and the petroleum strategy of China’’
http://www.chinaiiss.org/bewrite/renhaiping/
20040327i.htm, (in Chinese.)
Shu, C.L., and Li, D.F. (2004) ‘‘The petroleum
security of China and the overseas operations of
enterprises’’ World Economic and Political Forum
(5), www.usc.cuhk.edu.hk/wk_wzdetails.asp?
id53908 (in Chinese.)
Steinfeld, E.S. (2002) Forging Reform in China. The
Fate of State-Owned Industry (Cambridge:
Cambridge University Press).
30
View publication stats
MINERALS & ENERGY VOL 21 NO 1 2006
Taverene, B.G. (1994) An Introduction to the
Regulation of the Petroleum Industry (The
Hague: Kluwer Law International).
Tian, C.R. (2000) ‘‘Review of China’s oil imports
and exports in 1999’’ International Petroleum
Economics, 8 (2), pp. 5–9 (in Chinese).
Tian, C.R. (2005) ‘‘Review of China’s oil imports
and exports in 2004’’ International Petroleum
Economics, 13 (3), pp. 10–16 (in Chinese).
Wu, K., and Han, S.L. (2005) ‘‘State-company
goals give China’s investment push unique
features’’. Oil and Gas Journal, 18th April,
pp.18–25.
Zhang, J. (2004) Catch-up and Competitiveness in
China. The Case of Large Firms in the Oil Industry
(London: RoutledgeCurzon).
Xin Ma and Philip Andrews-Speed
Centre for Energy Petroleum
and Mineral Law and Policy
University of Dundee
Dundee, DD1 4HN
United Kingdom
Fax: +44 1382 322578
E-mail: x.ma@dundee.ac.uk
and c.p.andrewsspeed@dundee.ac.uk