Philip presented a paper addressing the question of whether the overseas investments made by Asian national oil companies enhance security of supply in their home countries. The executive summary is below. The full paper will be published by NBR in September 2012, and will be available from their website at www.nbr.org.

executive summary

The last decade has seen a rapid expansion of overseas investment by Asian national oil companies (NOC) from China, Japan, Korea, India, and Malaysia. This has been driven by a number of policy objectives in both the Asian countries themselves and the host countries. For the Asian governments, security of energy supply is a high priority in the case of Japan, Korea, and India, but a lesser priority for the governments of China and Malaysia. Other government priorities include industrial and diplomatic policies. The NOCs have their own priority, which is to internationalize their operations and, in the case of China, to become major international oil companies.

Unlike in the early and middle twentieth century, the overseas investments by NOCs make little direct contribution to the energy security of their home nations because oil markets and, to a lesser extent, gas markets are much more integrated and have many more players, and oil is essentially a fungible commodity. These investments are unlikely to protect a nation against a physical disruption of supply unless the government controls the full supply chain, including shipping and pipelines. But sea lanes can still be blocked, though with difficulty in most cases, and pipelines can be blown up. Likewise, these investments fail to protect their home nations from price spikes unless the government or the NOC bears the financial loss. The greater engagement of the Asian NOCs and their governments in the hydrocarbon-rich regions of the world may provide indirectly enhanced security of supply. Although these overseas investments yield few benefits, they can have significant costs, notably in the form of financial losses, but also reputational costs to NOCs and their home governments. They also carry an opportunity cost.

Regardless of this logic, the governments of these Asian countries are likely to continue supporting overseas investment by their NOCs for as long as their other objectives are also met, for as long as oil prices remain relatively high, and for as long as host governments are willing to give them preferential treatment.