China's national oil companies build their presence in North and South America

Although CNPC’s first overseas investments in the early 1990s were in North and South America (Canada and Peru), these continents have not been prime targets for China’s national oil companies (NOCs).  Rather, the companies have been directing their attention to Central Asia, the Middle East and Africa. The period since May 2009 has seen a dramatic change, and in the fourteen months to July 2010 all four of China’s NOCs together spent well over US $ 15 billion dollars in acquiring assets across the Americas, as well as lining up other opportunities in the region. These investments create a marked shift in the global structure of their international upstream portfolios and bring these NOCs in ever closer contact with international oil companies (IOCs).

The period 1992 to 1995 saw CNPC make small investments in existing oil fields in Canada, Thailand and Peru, as well as in exploration acreage in Papua New Guinea. At the same time CNOOC bought shares in a producing field in Indonesia. This could be seen as a phase of experimentation and learning, with low risk. The years 1996 and 1997 saw a sudden surge in the level of investment, with major commitments being made by CNPC in three countries which were seen to have the potential to produce substantial quantities of oil: Kazakhstan, Venezuela and Sudan.

By 1998 this surge had waned. The five years from 2002 to 2006 saw a rapid resurgence in the level of outward investment by China’s oil industry and this, in part, paralleled the rise in international oil prices. An estimated twenty billion dollars were committed in tens of projects in more than 30 countries. The destinations included major oil and gas producers in the Commonwealth of Independent States, in the Middle East and in Africa such as Russia, Kazakhstan, Iran, Saudi Arabia, Libya, Algeria, Angola and Nigeria. In addition to these potential major sources of oil and gas, target countries were spread across the African and South American continents, as well as South and East Asia and Australia.

The period 2007 to 2008 saw a lull in major new investment commitments.  The most important achievement for CNPC at this time was the signing of a contract for the Al-Ahdab oil field in Iraq. Sinopec was awarded a contract to develop the Iran’s Yadavaran gas field and CNOOC’s subsidiary, China Oilfield Services, spent US$ 2.5 billion to buy the Norwegian oilfield service company, Awilco Offshore.

By mid 2009, barely 5% of the estimated US $ 45 billion of investment in overseas upstream assets made by Chinese NOCs had been directed to North and South America, and most of this small share was in Venezuela.

The first strong signal of a change of focus came in February 2009 when the China Development Bank agreed to lend Brazil’s national oil company, Petrobras, US$10 billion in return for supplying between 60,000 to 100,000 barrels per day of crude oil to Sinopec and between 40,000 and 60,000 barrels per day to PetroChina. It was also understood that China’s NOCs would be granted some access to offshore oil reserves, especially in the newly discovered sub-salt play.

A year later, between March and May 2010, China’s NOCs took steps to establish themselves as major players in Argentina, Brazil and Venezuela. In March 2010, CNOOC paid US $ 3.1 billion for a 50% share of the Argentine company, Bridas Corporation, which has assets across Latin America. The following month, in Brazil, Sinopec signed a strategic agreement with Petrobras and the China Development Corporation which may lead to Sinopec gaining shares in two deep-water exploration blocks.  At the same time, PetroChina signed an agreement with Venezuela to cooperate and provide the finance for the development of the Junin-4 heavy oil field, which is believed to contain nearly nine billion barrels of recoverable reserves. In May, Sinochem purchased from Statoil a 40% stake in the Brazilian heavy oil field, Peregrino, for US $ 3.1 billion.

To the north, both Sinopec and CNOOC had held only modest positions in Canada’s tar sands industry since 2005, but over the last year both PetroChina and Sinopec established themselves firmly in this region. In September 2009, PetroChina paid US $ 1.7 billion for a 60% stake of two new projects owned by the Athabasca Oil Sands Company. In the second quarter of 2010 Sinopec paid US $ 4.65 billion to ConocoPhillips for its 9% share of the Syncrude project and boosted its share in the Northern Lights project, where Total is its partner,  by 10% to 50% .

Meanwhile CNOOC has been busy in the Caribbean and the USA. In May 2009 it bought Talisman’s assets in Trinidad and Tobago, and in November it purchased from Statoil a share of four oil fields in deep-water Gulf of Mexico position, marking the first arrival of Chinese NOCs in this basin.

Collectively these moves reflect a number of apparent changes or at least adjustments to the international strategies of China’s NOCs. Firstly, the companies are now building positions on the western margin of the Atlantic Ocean, a region which has long been the preserve of the IOCs. In the past their involvement in the Atlantic had been limited to West Africa. Secondly, these steps illustrate the intention of the Chinese NOCs to get involved in unconventional oil resources and this matches their moves to acquire interests in Australia’s coal-bed methane basins.

Thirdly, these investments bring them into closer partnership with IOCs and with other western companies: BP (a shareholder of Bridas), Statoil, Total in Canada, BHP Billiton in Trinidad and Tobago, and Statoil in Brazil and the USA. These new partnerships are part of a wider trend seen in the last year or so. In the Iraq, CNPC has joined  BP and Total for two separate oil-field development projects. In the southern hemisphere, Shell and PetroChina teamed up to buy the Australian company, Arrow Energy, in order to gain access to the country’s coal-bed methane resources. This acquisition is part of a wider engagement between Shell and PetroChina in the gas industry within China and overseas.  Shell will sell Liquefied Natural Gas (LNG) from Australia and from Qatar to PetroChina. Within China, Shell has been active for several years in the development of the Changbei gas field in the north of the country and pipes the gas to Beijing. Shell has recently also been awarded a gas production license in Sichuan Province. A second major gas deal to be announced was between BG and CNOOC. They signed a 20-year supply contract for Australian LNG which is being produced from coal-bed methane. The arrangement also gives CNOOC a stake in some of  BG’s Australian gas operations.

In many ways these recent developments show that China’s NOCs are becoming more like IOCs in respect of the projects they seek and the partners they chose. Yet, they still remain distinct in terms of the scale of  funding they can secure and the political support they are provided by their government. But having entered the western hemisphere, they now have to show that they can adhere to the ever more demanding technical, safety and environmental standards.

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