学校代码 : 学号 : 硕士学位论文 中国国有石油公司非洲投资战略的驱动因素研究 系 : 经济学院 专业 : 区域经济学 ( 中国经济 ) 吴力波副教授 指导教师 : 完成日期 : 2013 年 4 月 26 日

Transcription

1 学校代码 : 学号 : 硕士学位论文 中国国有石油公司非洲投资战略的驱动因素研究 院 系 : 经济学院 专业 : 区域经济学 ( 中国经济 ) 姓 名 : 丽阳 指导教师 : 吴力波副教授 完成日期 : 2013 年 4 月 26 日

2 指导小组成员名单 NAME 吴力波陈冬梅何喜有孙立坚刘军梅 TITLE 副教授副教授副教授教授教授

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4 TABLE OF CONTENTS 摘要... iii Abstract... iv Acknowledgements... vi VITA... vi LIST OF TABLES... vii LIST OF FIGURES... viii 1. Introduction and Background Literature Study Introduction to the Chinese National Oil Companies Empirical study of Chinese NOCs involvement in African oil Trade data Oil-for-loans deals Investment decisions Investments in exploration and upstream relations Refinery investments and the downstream segment Investments in infrastructure Mergers and Acquisitions Labour and Migration Empirical findings Theoretical analysis of the internal driving forces behind the NOCs observed activities at home and abroad Increasing Chinese oil dependency Overcapacity and continued expansion of Chinese refineries The interplay between governmental policy and commercial interests Regulations and price controls in the domestic refined oil and fuels market Structural changes in the domestic oil market Theoretical analysis of the external driving forces behind the NOCs observed activities at home and abroad The African upstream market Minimizing transaction costs and transport risks Overcoming regional political and security risks Diversification of overseas portfolio Uncertainties of international oil prices i

5 4.6 South-South business relations internal and external factors giving unique Chinese comparative advantages to doing business in Africa Conclusion and Policy Implications References Appendix A1. LIST OF INTERVIEWEES A2. Introduction to Det Norske Veritas, DNV A3. Additional tables and figures ii

6 摘要 本论文着眼于中国国家石油公司在非洲石油市场的活动, 以此为基础来剖析中国的能源安全问题 在设定了双边贸易的一些相应特质并引入经验公式的研究结果后, 我们试图通过讨论影响中国国家石油公司决策过程的内外因素来论证说明每一个研究结果 我们通过研究两个地区间的贸易历史数据, 希望能发现相对于其他主要的石油产区而言, 例如南美 中亚 俄罗斯及最重要的输出地中东, 中国对从非洲进口石油的依赖度是否日益增加 自 20 世纪 90 年代初起, 中国的确不断加速其从非洲进口石油, 远高于除中东以外的所有地区, 然而, 这仅适用原油 未提炼油 至于经过提炼的成品油, 正好和原油产品的进口呈相反的状态, 首先中国的进口量相对而言较少, 其次输出地区都选择经济发达的亚洲国家, 例如新加坡和韩国, 而不是从非洲或中东直接进口精炼油 一份全面的进出口格局研究表明这是一个全球性趋势 原油运输更简单且经济, 因此在国际间贸易中多被采用 我们进一步发现, 从非洲运回中国的原油并不完全用于满足国内的需求, 事实上其中很大一部分由中国国家石油公司或他们的合作伙伴在国际及地方市场上出售, 相比受中国政府宏观调控政策的油来说, 价格更有吸引力 但是非洲与中国之间航线距离长且安全风险高导致运输成本昂贵, 相反, 中国通过介入非洲石油市场并与之建立长期的商业关系既能间接的保障了本国能源安全, 并且从中获取利润用于购买更近更容易获得的石油 因此我们必须研究投资数据以及兼并收购的趋势, 试图间接地去发现中国国家石油公司在非洲的投资到底有多深入 在有关中国海外石油活动的决策过程中主要涉及三方 中央政府, 大型金融机构和国家石油公司, 以国家能源安全 商业利益和发展为综合目标, 在此基础上共同决策, 发挥作用产生成效 关键字 : 原油, 石油, 能源安全, 中国, 非洲 中图分类号 :F12 iii

7 Abstract This thesis looks at Chinese energy security from the viewpoint of Chinese National Oil Corporations involvement in the African oil market. After establishing some characteristics of the bilateral trade and involvement through a study of empirical data, we attempt to explain each finding through a discussion of the influence that internal and external factors have on the decision-making process of the Chinese oil companies. We study time series of trade data between the two regions to discover whether China has been importing more oil from Africa than earlier, relative to the other source regions of South America, Central Asia, Russia and most importantly the Middle East. Imports from Africa have indeed been accelerating since the early 1990s far above all regions except the Middle East. This, however, only holds true for crude, unrefined oil. In the case of refined finished petroleum products, China first of all imports relatively little as opposed to crude products, and it secondly mainly imports its refined oil from other developed Asian economies such as Singapore and South Korea not from Africa or from the Middle East directly. A generalized study of export and import patterns show that this is a global trend; crude oil is easier and cheaper to transport and so the form in which most oil is traded internationally. We further find that much of the crude oil China takes out of Africa is not, in fact, transported home to satiate domestic demand. A large portion is sold on international or local markets by the Chinese National Oil Companies or their partners instead, as there are better prices to be found in there compared to those under Chinese fuel control, and as the distance and security risks of shipping routes between Africa and China are simply too costly. Instead, Chinese involvement in Africa is indirectly supporting energy security by establishing long term business relationships and making money for the purchase of oil closer to home. Thus we must study investment iv

8 data and trends in mergers and acquisitions to attempt indirectly to discover how deeply invested Chinese oil companies really are in Africa. It seems that the three main parties involved in the decision-making process of Chinese overseas oil involvement; the central government, large financial institutions and the national oil companies, function together to produce a result based on a combination of national security concerns, commercial interests and developmental goals. Keywords: crude oil, petroleum, energy security, China, Africa Chinese Library Classification Code: F12 v

9 Acknowledgements I thank my Fudan University Thesis Advisor, Professor Wu Libo for her shrewd advice and guidance in the process of researching and writing this paper. I offer my sincerest gratitude to DNV Maritime Shanghai for their sponsorship of this thesis, and in particular Regional Advisory Manager James Wu and Senior Analyst Pierre Pochard for their continuous support, for the resources put at my disposal and for the unique approach that has been made possible for this project by your insight and expertise. Thank you to the experts, analysts and subject-matter professionals who offered up their time to grant me interviews in the research stage of this thesis. Your varied perspectives gave this project the breadth and detail it needed. This paper, this degree and the education it represents would not have been possible without the unending support of my family back in Norway. Thank you all for putting up with me through my homework crises, exam jitters and nerdy schoolgirl ways. Most of all I owe my success to my wonderful husband Tor Aleksander. Your support, kindness and patience throughout my whole higher education have been far more than I deserve. The road turned out much longer and more difficult than we had planned, but today we embark on the next part of the journey together. We did it. VITA April 12, Trondheim, Norway May, 2004 International Baccalaureate, Sandefjord May 2011.B.A. Economics, University of Bergen June 2013.M.A. Chinese Economy, Fudan University Fields of study: Economics, Development Economics, Chinese Economy vi

10 LIST OF TABLES Table 1. Key characteristics of the three large Chinese NOCs in Table 2. China s loans for long-term oil and gas supply signed since January Table 3. Overseas Investments by China s National Oil Companies Table 4. China s top coal, oil and natural gas projects abroad Table 5. China, Refinery capacity forecasts by company (MMTPA) Table 6a. Crude oil imports into China from source regions and countries Table 6b. Crude oil imports into China from source regions and countries Table 7. Refined oil imports into China from main source regions Table 8. Distillation Unit Capacity of China s main refineries (MMTPA), vii

11 LIST OF FIGURES Figure 1a. The importance of China in the African bilateral oil trade Figure 1b. The importance of African oil in China s direct imports Figure 2. China s main import source countries and regions for crude oil Figure 3. China s main import source regions for refined oil Figure 4. Crude versus refined global exports and imports Figure 5. China s Refineries Output Combination Figure 6. African refinery capacity barely growing while production is volatile Figure 7. The distribution of global oil production and consumption Figure 8. China s oil dependence Figure 9. Oil imports into China versus domestic production Figure 10. Chinese energy demand by sector over time Figure 11. Chinese oil demand by sector over time Figure 12. The low Chinese reserves-to-production ratio Figure 13. Chinese refinery capacity accelerating, taking the lead Figure 14. Overcapacity of Chinese refineries Figure 15. Composition of Chinese oil imports Figure 16. High in international oil prices give refinery and marketing losses (USD per barrel) Figure 17. Global oil reserves by country Figure 18. African oil reserves by country over time Figure 19. Map of Africa Figure 20. Chinese total energy production and consumption Figure 21. Excess production in alternative oil sources regions Figure 22. Oil production in selected African producers Figure 23. Real GDP growth in the US, Eurozone and Japan and BRIC countries viii

12 1. Introduction and Background Trade between developing countries is accounting for increasing portions of global numbers, which suggests that the center of gravity of the world economy is moving southwards. Global production is increasingly being targeted towards African, Latin- American and Asian consumers, and African countries are growing in importance as production bases in their own rights. The growing economic bond between China and African countries are among the clearest signs of this change. This paper will attempt to be a useful addition to the growing literature on Sino-African economic relations, by looking at the particular market of crude oil extraction, refinement and trade. This perspective is chosen because of the crucial role energy security plays in economic growth and security, something the five-year plans since China took off in the 1990s are increasingly pointing out. As Chinese economic growth is such a unique case historically and globally, and as African economic development is among the most important global future challenges in this author s opinion, Sino-African energy relations is a very interesting and important issue to study. For this purpose, The Norwegian Veritas (Det Norske Veritas; hereby DNV) has offered up its resources, insight and workspace to me for a period of six months, and I hope my research and conclusions will prove a useful and interesting repayment for their generosity. DNV is a global leader in the area of ship classification and risk management in the maritime sector and thus deeply involved in oil market analysis and international ship traffic. Please see appendix A2 for more details about DNV. A main objective of this thesis is to determine whether there is factual support behind the various and increasingly intense rumors and speculation in the global media and academic circles that China is quietly establishing a foothold in the African oil markets, both because of a concrete governmental strategy, potential for profits, and because of uniquely Chinese comparative advantages of doing business in Africa. I hope through detailed study of trade data, investment information, and indicators of other oil-related activity pursued by the Chinese National Oil Companies, NOCs, in addition to recent five-year plans and official guidelines from the Chinese government, to discover whether the empirics really supports this apparently increased tilt in focus in Chinese energy relations towards Africa. This is not to state that activities in Africa are necessarily occurring at the expense of those in for 1

13 example Russia, Central Asia or the Middle East, but that the marginal growth as China depends more and more on international sources for energy may to increasing degrees be occurring in Africa alongside or above growth elsewhere. Not only the extent of direct trade, but its form and trends must be determined, and three main findings from the empirical study will be highlighted and discussed in detail. The form of the oil trade occurring between China and Africa will be studied in terms of the type of oil involved raw crude oil as opposed to refined, finished oil products as well as the final destination of the oil Chinese NOCs find and produce on the African continent. It is far from obvious that Chinese oil exploration and production in Africa necessarily translates into African oil being imported into China, despite a well-known thirst for energy domestically. As DNV is involved in ship verification and maritime market analysis, my supervisors would be interested to know whether future Chinese oil transport is likely to occur in the form of crude oil or finished product, and which routes it is likely to take. As we are forced to limit this study to the workings of the oil markets, we leave an extensional study into the gas, coal, and other energy markets to future research. A number of data sources including Global Data and IHS databanks and other resources available to DNV, the statistical library of the Norwegian Central Bank, British Petrol s statistical review of world energy, annual reports of the NOCs, and information from Customs Bureaus and stock markets, will be scoured to eliminate the margin for error and get as complete a picture as possible. As my interview subject formerly working at CNPC, Guo Jian noted, this topic is so complex and little transparent that not even senior consultants within the NOCs will be able to answer it fully, but due to this fact in itself, the effort of a study into its depths will be worthwhile for its own sake. A total of twelve in-depth interviews on the subject have also been conducted throughout this period, with experts on the actions of the Chinese NOCs, the maritime market, and international energy concerns both within Norway, Europe, Africa and China. This thesis empirical approach and theoretical analysis are both to great degrees owed to the insight of the specialists giving up their time for an interview, and their opinions and ideas are sighted throughout the text. A list of the details of each interview subject can be found in the appendix A1 to this paper. A theoretical analysis of the decision-making process leading to these activities and trends in oil relations between China and Africa must be the second objective of this 2

14 paper. While it is difficult due to data availability and the sensitivity of the issues to empirically prove the exact extent of the shift in investment and trade structures towards Africa, analysis of the economic theoretical framework of the global and domestic energy markets show why it is economically rational for the NOCs to act as we believe they are. The interplay between government policy and commercial interests both within the NOCs and Chinese financial institutions often supporting them must be addressed, both in the light of external and internal factors influencing the NOCs driving forces. Among the international factors the NOCs must consider are the many relatively new oil finds and unexplored fields of the African continent up for the taking and the high quality of the oil allowing it to be refined easily and more cheaply than oil from for example South America. Transportation costs out of Africa are also lower than from other regions, though the shipping route between Africa and China specifically is long and hazardous. The uncertainties of global oil supply and demand and international oil prices have influenced Chinese NOCs in particular rather a unique way throughout the global financial crisis in addition to speaking for diversification of oil sources and a focus on domestic supply and production potential. The supply and demand of oil-exporters and importers are external factors to be explored, and risk management both of country-specific risks in Africa, transportation issues and diversification of overseas portfolios also comes under the external factor heading. Finally a deeper look into some possibly uniquely Chinese comparative advantages to doing business in Africa will be performed. Internal factors specific to China that influence the overseas investment decisions of the NOCs include above all the supply and production potential of oil within China, along with the forces and structure of domestic oil demand as the economy grows and transforms. Then comes the internal factor most often cited as an obvious explanation for all the NOCs behavior, namely the official energy policy of central authorities. This turns out not to be quite that simple, however, and the duality with which the NOC management must operate both as political representatives and commercial business leaders will be discussed in detail. On the one hand they are charged with securing energy supplies for a growing domestic market; on the other they turn out to have rather free reign when it comes to the ways in which to ensure this. However, state influence through the direct channel of price controls in the domestic fuels market cannot be denied and deeply influences the NOCs decision as to where to sell 3

15 their final and crude products, the profitability of their refineries. The evolution of the degree of competition the NOCs face on domestic markets from having virtual monopolies in their separate provinces and niches to engaging in oligopolistic competition with each other, to facing increasing competition, investment and joint venture opportunities from foreign oil companies recently will be discussed along with the behavior it has inspired in the NOCs overseas activities, bidding processes and integrated business structures. This thesis is organized as follows; Chapter 2 gives an overview of the bilateral oil relations between Africa and China through an empirical study of the available evidence. Chapter 3 presents the driving forces of the Chinese NOCs internal to China and its market that may explain the findings of the empirical section. Chapter 4 presents external global and regional factors influencing the NOCs towards the activities we have observed, and chapter 5 concludes. 1.1 Literature Study The main literature on which the approach of this study is based, is Jiang and Sinton s Overseas Investments by Chinese National Oil Companies; Assessing the drivers and impacts (2011) under the IEA and Sanderson and Forsythe s China s Superbank: Debt, Oil and Influence How China Development Bank is Rewriting the Rules of Finance (2013). Jiang and Sanderson assess the motivations and strategies of Chinese NOCs overseas as well as the fragmented, decentralized and evolving relationship between the NOCs, the Chinese government and others players in the Chinese political system. They find that Chinese oil companies main oil interests are located in Kazakhstan, Venezuela, Sudan, and Angola and that while Chinese investments in transport and pipelines throughout Asia do serve to diversify oil sources and reduce the vulnerability to regional risks, the NOCs will continue to rely on oil imports from Africa and the Middle East. This involves the transport costs and risk of passing through the long routes and the Strait of Malacca. This thesis discovers the same likelihood for reliance on both the Middle East and Africa in the future. Sanderson and Forsythe discuss the activities and drivers of the Chinese NOCs by looking closer at their main backer in international investments and loans in particular in Africa. They find as this study does that commercial considerations often offer higher explanatory power over NOCs and the financial institutions actions than long-term 4

16 state goals of energy security and diplomacy, although particularly in government-togovernment deals such as those in South and Central America s oil-for-loans deals, state influence is certainly higher than in direct and simple oil trade deals. Diversification of oil source countries and transport routes is in the interest of both the individual NOCs and national energy security, but all the authors find that there is a tendency for the companies to speak in domestic communications of their overseas activities in terms of national security objectives, but that the relationship is much more complex in reality with often divergent interests. The NOCs and national banks both are government-owned to large extents, but not government-run; they have independence from central authorities just as their own subsidiaries may run largely independently of their parent companies. The observed behavior is the result of a complex interplay between individuals and groups associated with the firms whose interests are not always aligned and commercial interests are the main driving force of the NOCs overseas oil investments, and of the marketing of the NOCs equity oil abroad. The Chinese national banks become a vehicle for official policy in the NOCs movements through the way they offer financing. However, there is no government quota on how much of their oil to ship home to China, which means that new acquisitions do not translate neatly or exclusively into supplies flowing into China. This is also one of the main findings of this thesis. Jiang and Sinton s paper also discusses the ways in which the NOCs were able to benefit from the unique situation during and following the global financial crisis a topic to which this thesis continually shall refer both in terms of internal and external forces. Finally, it calls for further discussion on the particular investments NOCs pursue in Africa and Latin America compared with other energy companies and on the influence of domestic market trends on the overseas investments of NOCs. This thesis hopes to supply a little of both. In addition to these, a wide array of journal articles, books and periodicals have been studied to get a comprehensive picture of recent literature on the issue. Most often, however, the study is of China s actions overseas treated as a single entity; studies often don t look into the intricacies, discrepancies and sometimes complete collisions of the different parties involved in the decisions that finally lead to NOCs activities. This paper hopes to avoid this oversight and continually differentiate between the incentives of the many institutions and companies involved. 5

17 1.2 Introduction to the Chinese National Oil Companies The politically and commercially powerful, yet highly government influenced Chinese National Oil Companies (NOCs) are the main vehicles through which China s oil activities in China are being performed. Holding a large portion of the shared oligopolistic power over the oil and gas industry in China are the big three ; China National Offshore Oil Corporation (CNOOC), China Petroleum & Chemical Corporation (SINOPEC), and China National Petroleum Corporation (CNPC). The larger parent companies also have subsidiaries under different names, such as CNPC s Hong Kong listed subsidiary Petro China. The first Chinese oil company to come to the market in 2000, Petro China is still the biggest of the publicly traded Chinese oil companies and seen by many as China s principal oil sector proxy. CNPC and thus the government holds 86 percent of the shares (BMI, 2012). While the smallest among the three, CNOOC is China s largest offshore oil producer. CNPC is the largest producer and supplier of oil within China and ranks 2 nd on Fortune China 500 lists. It is one of the world's major oilfield service providers and a globally reputed contractor in engineering construction (CNPC, ). In 2011, CNOOC acquired 31 oil and gas exploration fields in 14 countries overall, producing 7,66 million tons of overseas crude oil. The urge to reach out from domestic boundaries is clear (CNOOC, 2012). SINOPEC is ranked 1 st on Fortune China 500 (CNNMoney, 2013), and its key business activities include exploration, production, storage and transportation, marketing and utilization of oil and gas. See Table 1 for a comparative overview of the three. Table 1. Key characteristics of the three large Chinese NOCs in 2011 Total assets (mill. RMB) Total profits (mill. RMB) Number of employees 2012 Fortune Global rank State % ownership CNOOC 718, ,300 4, CNPC 3,027,876 1,817,000 1,000,000* SINOPEC 1,130, , , Data sources: (CNOOC, 2012), (CNPC, 2012), (Sinopec, 2013), (CNNMoney, 2013) *(PetroChina has 540,000 employees) 6

18 Not only involved in the exploration for oil, the NOCs also own and run refineries for the production of crude oil into refined petroleum products. CNPC emphasizes integrated upstream and downstream processes and was in July 1998 reorganized to this end. Petro China now accounts for over 39 percent of the domestic fuels market, processing almost 2.7 million barrels of crude a day and having more than 19,000 service stations (BMI, 2012). CNOOC also evolved from an upstream company to a fully integrated energy company when the world-class CNOOC-Shell Petrochemicals Co., Ltd was successfully put into production in The refining segment now plays an important part in CNOOC s expansion, and in 2007 the sales revenue of this downstream sector actually exceeded that of the upstream sector (CNOOC, ). Sinopec lists oil refining among its key areas of business, along with the wholesale of gasoline, kerosene, diesel, petrochemicals, and other products of refined crude oil. There is also a long list of smaller Chinese oil companies that are still major by international standards, such as state-owned Sinochem, which was number 113 on Fortune Global 500 (CNNMoney, 2013)) that held a monopoly on China s oil imports and exports before CNPC and SINOPEC branched into this area. Zhenhua Oil Company is a subsidiary of China North Industries Corporation manufacturing oil field equipment and has partnered with CNPC in Syria and Iraq. 7

19 2. Empirical study of Chinese NOCs involvement in African oil This chapter will lay out the empirical evidence gathered from a large number of databanks, previous literature, interviews with experts and first-hand accounts that shall set the background for our discussion of the decision-making process of the NOCs in relation to African oil. Due to widespread disagreement as to the extent of freedom the NOCs have in pursuing their incentives abroad and at home as well as the difficulty in obtaining reliable data in the sensitive issues of energy supplies and security, a large portion of the research of this thesis was devoted to gathering as comprehensive a picture as possible as to the degree and mode of their involvement in Africa. See the appendix A3 for a map of Africa. We have been in extended contact with representatives of CNOOC and CNPC for their comments, but as expected, the result was a polite no as the issues were too commercially and politically sensitive. We had a chat with a previous employee of the CNPC who was willing to give some general speculative comments, and a very insightful private conversation with a Chinese subject-matter professional who also did not wish to go into exact figures or numbers. According to him as well as most of the interview respondents, China is more concerned that most about energy security and considers it sensitive close to the level of national security. Adding to the data difficulties of this particular thesis, DNV s Senior Surveyor in Nigeria, Ben-Goru Ofeke, confirms that the same difficulty exists on the other side. Informationgathering about crude oil sales in Nigeria is hindered by the amount of agents involved in illegal oil deals, preferring nobody to ask too many questions. Official state information on the trade may not be accurate because some crude oil dealers interests close to the government are being protected. In addition, many independent statistical banks on international investments and M&A activities charge high prices for their information. The main data for this study has been generously provided by the marketing department at the Norwegian Veritas (DNV). They have access to IHS Global Insight forecasts on seaborne trade Global Data reports on global and regional energy markets, as well as the Lawrence Berkeley Statistical Library s China Energy Databook. The annual reports of CNOOC, CNPC and SINOPEC provide investment 8

20 and M&A details, along with BP Statistical Review of World Energy All raw data can be made available upon request. This empirical section is divided into trade data and investments in oil-related activities in Africa, and also discusses less direct sources of information on Chinese involvement such as labour migration, mergers and acquisitions of other Africarelated companies and oil-for-loans deals Trade data A clear point from which to begin studying evidence of bilateral oil relations between China and Africa is to look at the trade of oil between them. Figure 1 shows that China s relative importance as an oil export destination for Africa was 18 percent in 2011, calculated as the proportion of quantities exported to different regions out of Africa (author s calculation). Exports of oil to China in 2011 were six million tons from North Africa, 42,4 million from West Africa and 13 million tons from East and Southern Africa. As to the ratio of Chinese oil imports that come directly from Africa, we the percentage in 2011 was four from East and Southern Africa, 13 from West Africa and two from the North, totaling 19 percent overall. It is clear that the main competitors for Chinese demand are Russia, South and Central America, Asia Pacific regions including Central Asia, and the Middle East. Keep in mind, however, that this refers only to direct imports; many other types of oil involvement exist that we have yet to explore. 1 While studying ship traffic to discover Chinese ships moving between the two continents and perhaps sometimes selling their wares abroad may seem an obvious approach to discovering increased relations between Africa and China, detailed studies of for example the popular real-time ship tracking site Marinetraffic (2013) revealed that very few Chinese-flagged ships could be spotted anywhere near the expected routes. This proves very little, however, as much of China s activity in Africa occurs through foreign partners, or only within investment; not transport, or finally by chartering space on other ships from other companies or countries to transport Chinese oil and goods. 9

21 Figure 1a. The importance of China in the African bilateral oil trade Figure 1b. The importance of African oil in China s direct imports Data source: (BP, June 2012) Moving on to trends over time for the specific countries from which China has imported oil in the past decades, we take care to separate between crude oil and refined petroleum products as the two have very different trade and pricing structures. Figure 2 shows the dominance in the early 2000s of Middle Eastern countries such as Saudi Arabia, Iran and Oman among China s source countries for crudes, while African countries such as Angola, Sudan, Congo and Equatorial Guinea are also 10

22 among the top chosen. Most notably we see Angolan imports almost catching up to Saudi Arabia s recently in percentage terms. In 2006, Saudi imports into China are at 23,871,515 tons, while Angolan imports are 23,452,009 tons. In regional terms, however, the Middle East has and will remain China s most important import source for crude oil for the foreseeable future. A table of the raw data can be found in appendix A3. China imported 23,4 million tons of crude in November 2012, of whish 22,6 percent came from Saudi Arabia, 12,9 percent from Angola and 8,5 percent from Russia (ICIS, 2012). Figure 2. China s main import source countries and regions for crude oil Data source: (LBNL, 2008), Chptr. 7, (ChinaCustoms, ) 2 2 This figure has been constructed by supplementing Lawrence Library s data with data directly from China Customs, from which Lawrence Library retrieved its data. Slight 11

23 Africa is, however a clear and growing second. IHS Global Insight (2013) estimate that China s imports of crude from West Africa alone should amount to 102,5 million tons by the year Further, we see that imports from Africa exceed those of every other major source region apart from the Middle East - and increasingly so. Keep in mind that these figures show shares of imports, not absolute amounts. When it comes to the Chinese import of refined petroleum products, the picture looks starkly different. Figure 3 depicts the other Asian countries far exceeding any other region in terms of refined products sent to China, among which South Korea tops the list. Singapore also sends vast amounts of refined oil to China, while Russia has recently given the Asian countries a run for their money. This is no doubt due to large investments in land pipes created recently towards China from Russia. The only countries from which China mainly imports refined petroleum products are the larger Asian economies of Japan, Singapore, Hong Kong, Taiwan (ROC), Rep. of Korea, Indonesia and India. Note, however, that China has invested in a lot of refineries in Singapore and South Korea, perhaps explaining some of the purchases from these. Petro China has for example acquired Singapore Petroleum Company which has strong downstream assets in the Asia-Pacific region. The Chinese NOCs are thus in a position to supply Chinese markets with refined products when necessary through this channel, instead of necessarily through their own equity oil further away. We do not know, however, the original source of the refined oil coming in from the other Asian countries. They are unlikely to have found it in their own oilfields, and we know Singapore and South Korea do import a lot of crude from Western Africa. The raw data can be found in appendix A3. inconsistencies must be accepted as the former reports in USD value, and the prices of oil from different regions may vary 12

24 Figure 3. China s main import source regions for refined oil Data source: (LBNL, 2008), Chapter 7, (ChinaCustoms, ) African contributions in refined products are barely noticeable in the figure. The oil sent directly to China from Africa does seem to be overwhelmingly in crude form, which suggests another important finding; the Chinese NOCs seem to prefer refinement of the oil for domestic use to occur either within China or in other Asian countries, rather than investing in refineries locally in Africa and transporting the oil in refined form back to China. DNV s Senior Surveyor in Nigeria, Ben-Goru Ofeke, assures that after Chinese NOCs took over fields in Nigeria previously owned by Addax, they transported it all out of Nigeria as crude, not refined, oil. He could not confirm their destination, but he knows of one large container ship that takes crude directly from Nigeria to China, at least. Norway s oil giant Statoil also has exploration and production in Angola and Nigeria, and also choose to ship it in crude form. Furthermore, Statoil sells the crude internationally instead of taking it to Norway. Figure 4 reaffirms what we already suspect above from another data source and from the larger viewpoint; that China, just like most oil-importing countries, imports mainly crude oil. Correspondingly, most oil-exporting regions mainly export in crude form, even the Middle East with its many export-related refineries, and Africa is clearly among these. In fact, in 2011, 75,2 percent of North Africa s petroleum product exports were crude; 96,7 percent of West Africa s exports were crude and the number for East and Southern Africa is 98,1 percent. Thus we can expect that what is 13

25 refined domestically is to a large degree headed for domestic consumption or intraregional trade. A further finding to take away from Figure 4 is that China is among the largest oil importers in the world in 2011 and certainly the largest single country. Figure 4. Crude versus refined global exports and imports Data source: (BP, June 2012) Note that China actually exports a little refined petroleum in spite of an oil-hungry domestic market. This is expected to continue into the future and even increase fractionally from 539,900 barrels daily in 2011 to 601,700 in 2020 (GlobalData, 2012a). This is still a very small number, but the puzzling phenomenon must be discussed in the theoretical analysis chapters below. To get into further detail here, we separate the finished products refined within China by type in Figure 5 and see that China mainly produces diesel oil domestically, followed by gasoline. 14

26 Figure 5. China s Refineries Output Combination Data Source: (LBNL, 2008) According to the International Energy Agency, China mainly exported refined products like gasoline abroad as this was not demanded locally, while keeping kerosene and diesel for domestic use. This seems to explain some of the phenomenon above already. A complication to studying only bilateral trade in order to determine the extent of interregional oil involvement between China and Africa is pointed out by PhD Candidate Jonna Nyman who is studying US-China energy relations. She informs us that a lot of the crude oil from Chinese state-owned oil fields abroad is actually not shipped back to China, but sold openly on international energy markets. This is despite the need for the oil within China. Petro China s marketing company confirms that whether or not to send the oil back to China depends solely on market prices. According to Jiang and Sinton (2011), a significant proportion of Chinese NOCs overseas equity production is sold into the market rather than sent to China, though it is not possible to determine the precise fraction. Almost all the equity oil China has in the Americas, for example, is sold locally in South and Central America, which would explain why import numbers into China from South and Central America are so low in the figures above. Because of this complication it will not be sufficient to look only at the directly traded oil between China and Africa we must attempt to determine whether any Chinese-owned oil from Africa is being sold internationally or locally within African countries. This is, however, practically impossible with the very basic state of African institutes and bureaus of statistics, as I as well as the authors of most 15

27 existing literature find. One possible avenue to explore is to compare the exports of oil reported to go out of Africa to Chinese oil companies to the oil reported to actually enter Chinese markets by for example Chinese Customs offices. If any deviance between these two data series is found, it should support the theory that much oil is being sold abroad by Chinese companies instead of being taken home 3. This approach is suggested by Sanderson and Forsythe, but they do not attempt it due to data availability on the side of the African countries. First-hand accounts from interviewees, newspaper articles and advice from experts do, however, leave little doubt that much of the equity oil of Chinese companies in Africa is not brought back to China, but sold locally or internationally. As to the extent to which Chinese-controlled oil is being sold locally, evidence is even harder to come by. However, according to CNPC s 2011 annual report, the company is deepening cooperation with oil-rich African countries Chad and Niger by building two joint venture refineries locally that became operational in 2011 and an integrated project with the upstream oil exploration, extraction and pipe line transportation. The first batch of diesel product produced in Chad s N'Djamena Refinery was delivered to the local market in July 2011, according to the report, and the gasoline, diesel and fuel oil produced through Niger s Zinder refinery will also first be supplied to Niger s domestic market and then exported to the surrounding countries. Neither project is intended to supply the Chinese markets, then, according to the CNPC Oil-for-loans deals China s famous oil-for-loans deals we choose to classify as a unique kind of bilateral trade with longer term implications than direct oil supply deals. The objective is to ensure access to resources over the long term, not to earn as much as possible immediately, which makes the deals more diplomatic and political nature than the deals pursued by the NOCs alone. They are usually supported by state-owned China Development Bank, CDB, or China Export and Import Bank, CEIM. Between 2001 and 2010, CEIM has lent 67,2 billion USD to Africa (Sanderson & Forsythe, 2013). The NOCs activities are deeply interconnected with those of the banks through these 3 Using the approach of tracking the deviance between imports into China and exports out of Africa, however, we must remember that it is commonly observed that the value of imports is larger than the value of exports. The deviance may therefore be larger in reality that it appears. This is due to the fact that transport costs are added on the way; exports are reported according to free on board basis, while imports are reported according to cost-insurance-freight (Olsevskaja, 2013). 16

28 deals, in which they form strategic relationships of financing and oil supply networks over a long period of time with foreign oil-rich governments. The NOCs are clearly indirect beneficiaries of the loans as they receive long-term oil and gas supplies along with greater success in deals abroad. In September 2010, both CNPC and SINOPEC formed alliances with CDB. The bank would provide 30 billion USD loans to CNPC at a low rate over the next five years to support expansion abroad. The CDB is China s largest Africa-focused investment vehicle. It has been central in crafting the biggest and perhaps most successful poverty-reduction program in Africa, has funneled billions of dollars supporting Ethiopian exports and reviving Ghana s railroad networks after decades of neglect. Certainly much of Chinese lending to Africa is focused on the extraction of oil and metals - CDB had provided at least 44 billion USD loans to resource-rich countries by 2009 and this does not even count the loans to Chinese companies investing in Africa themselves. The bank is a wholly state-owned financial institution, but at the same time a commercial entity that needs to stand on its own feet financially. It would be a mistake to call it a government bureaucracy, although its actions are unlikely to clash directly with official central policy. Sanderson and Forsythe s book about the CDB (2013) claims if you understand the China Development Bank, you understand the core of China s state capitalism working both at home and abroad a system of state-controlled banks and companies functioning in a sort of alternative free market. The CDB has been run since 1998 by chairman Chen Yuan, the son of Chen Yun; one of the eight immortals of the Communist Party. He is dubbed the world s most powerful banker. With its state backing, CDB has a firm belief in urbanization and developmental goals of the national economy. Its international lending is in most cases at commercial interest rates and follows the oil-for-loans deals that Western banks have pioneered in the past, it is its ability to lend on such long term conditions and such amounts that makes it so important and so different, along with the way it brings Chinese contractors and oil firms together in one neat deal, not necessarily the fact that its loans are so cheap. Of course, China also has a much higher demand for the oil that is the product of the oil, setting it in a unique position to provide them. Particularly after the onset of the global financial crisis did Chinese loans for resources take off, and between January 2009 and December 2010 Chinese 17

29 institutions lent more than 110 billion USD to developing nations according to the Financial Times. The World Bank sent 100 billion. In this period, CNPC and SINOPEC were involved in 12 oil-for-loans deals with nine different countries at an estimated 77 billion USD (Jiang & Sinton, 2011). The deals were quite diverse geographically, as can be seen from Table 2, but we see that since 2002, China has provided about five billion USD in oil-related loans to Angola, and that SINOPEC and Ghana s National Petroleum Corporation GNPC signed an agreement involving loans for the development of the Ghanaian Jubilee oil field. The loan agreements with Angola specified that 30 percent of the workforce for the infrastructural projects for which the money was earmarked, must be Angolan workers. Chinese contractors run the projects and most likely supply the rest of the labour, building railroads, schools, hospitals in addition to extracting the oil (Overn, 2012a). All funding except for that in the 2009 deal with Kazakhstan was provided by the China Development Bank. China Export and Import Bank funded the Kazakhstan deal. Table 2. China s loans for long-term oil and gas supply signed since January 2009 Date Country Borrower Amount (Bill. USD) Angola Angolan govermen 1 Beneficiary/Buyer Notes For agricultural projects. Since 2002, China provided an estimated USD 5 billion in Oil-related loans apr.09 Bolivia Bolivian govermen 2 To build infrastructure in return for energy contracts Brazil Petrobras 10 Sinopec & trading subsidiary Unipec 150 kb/d of oil in 2009; 200 to 250 kb/d from 2010 to 2019 at market price. Interest rate may be 6% Brazil Petrobras Sinopec Petrobras and Sinopec to co-operate in expanding deep-water explortation, production, refining and transport jul.09 Ecuador PetroEcuador 1 CNCP / PetroChina 96 kb/d for two years; Payment up front, interest possible 6.5% Sinopec and GNPC signed MOU on upstream, midstream and downstream releated oil projects. The loans proveded to GNPC are for the jun.10 Ghana GNPC Sinopec development of its offshore Jubilee Oilfield USD 3.3 billion used to buy 49% of Manguistaumunaigas (MMG) from Kazakhstan KMG 10 CNPC Indonesia's Central Asia Petroleum 300 kb/d for 20 yrs ( , 15Mt/y +/- 4.1%). Marked price at Nakhodka port to CNCP. Pricing could be quoted monthly. Will sell 9 Mt Russia Roseneft 15 CNCP to CNPC and 6 Mt to Transnet, for 20 years average rate of 5.69% Russia Transneft 10 CNCP For construction of pipeline linking East Siberia-Pacific pipeline system (ESPO) at Skovorodino to Chinese Daqing oilfield. Capacity 600 kb/d, lenght km. Transneft to build part in Russia (70 km) and CNPC to build part in China (980 km). China part finished June 2010 jun.09turkmenistanturkmengaz 4 CNCP 40 bcm/y of natural gas for 30 years Venezuela Bandes (PDVSA) kb/d of oil to CNPC, market price, term contact, USD 1-2/b discount is CNCP/PeteroChina offered, invoiced monthly. Joint development Bandes (PDVSA) USD 10 & Peteroles de Venezuela and CNPC to form joint venture to jointly develop Junin 4 block. It will produce 2.9 billion barrels of heavy oil over the next 25 years. Also tied with infrastructure projects including freeways and Venezuela & goverment RMB 70 CNCP power plants. Total: appr USD 77 billion Sources: IEA research; FACTS Global Energy (2010); Interfax; CNPC Reasearch Institute of Economic & Technology (2010); Chinese media reports Source: (Jiang & Sinton, 2011) 18

30 Despite successes in many such oil-for-loans deals, they are not the preferred method by the NOCs to gain foreign supplies. Risks involved are a change of foreign government causing contracts to be voided, or the supply may not be as agreed. However, the deals serve as important alternative methods of diversifying supply sources when quality assets for direct sale are often hard to come by. 2.2 Investment decisions In attempting to determine to what extent and how China is increasing its oil related activities in Africa, we should in addition to pointing to trade patterns also look at investment flows going from China towards Africa for the purposes of oil exploration and production and improving trade networks. Acquisitions of shares in fields and refineries and production bases are natural indicators to pursue which point to involvement which may not lead any of the products to be sent to China or even be owned by Chinese NOCs. As former CNPC employee Guo Jian regretted in our short interview, it is exceedingly difficult to get precise answers as to present actions or future plans of China s NOCs. Only they can know their plans, and much of the information is commercially sensitive, and intentions for future expansions may even be viewed as politically sensitive. However, from studying annual reports, company newsletters and official websites, we have pieced together some evidence of the NOCs foreign and particularly African investments in oil-related activities Investments in exploration and upstream relations Natural resources have been the main focus of Chinese overseas investment until very recently, and the types of companies making the investments are also increasingly varied, including smaller privately owned enterprises making most of the transactions, though not the largest deals, in addition to the NOCs. Still, 42 percent of China s top 40 OFDI (Outward Foreign Direct Investment) enterprises in 2008 were in energy of resource-related sectors, among which CNPC was the first (Jian, 2011), ensuring a more long-term and stable supply of energy than direct trade deals can give. The NOCs have invested in foreign bonds, stocks and derivatives within the energy sector, spurred on by the government s investment knowledge, information, guidelines, tax credits and other forms of financial aid. Table 3 lists the overseas investments of Chinese NOCs between 2002 and 2009, numbering about 65. We see that among the largest deals in dollar amounts are the 1,3 19

31 billion USD purchase of stakes in the Angolan block 32 by CNOOC and SINOPEC, the 2,3 billion USD purchase by CNOOC of interests in a Nigerian oil field, a 100 percent purchase of a Block A in Chad by CNPC and Petro China, and the two billion USD purchase of Block 18 in Angola by CNPC 4. Clearly, Africa is one of the main receivers of NOC investments recently. 4 The purchase of Awilco, a Norway-based ship owning company, is not directly related to any particular oil source country. 20

32 Table 3. Overseas Investments by China s National Oil Companies Year Company Assets Share (%) Deal size (USD billion) Purchased 20% stake for block 32 (Angola) from 2009 CNOOC and Sinopec Marathon Oil Sinopec Purchased 100% of Tanganyika for assets in Syria SNOOC Purchased 100% of Awilco Sinopec Purchased 60% of australia's AED oil for assets in Australia CNOOC Purchased of 50% interest in Husky (Madura) Energy's assets in Indonesia Sinochem Purchased 100% Soco Yemen for assets in Yemen Purchased 45% interest of OML 130 from South 2006 CNOOC Atlantic Petruleum Ltd in Nigeria Purchased 100% of Block H in Chad from Swiss 2006 CNPC / PetroChina company Cliveden Purchased 100% EnCana for oil and pipelina interest 2006 CNPC and Sinopec in Equador Purchased 97% of Udmurtneft for assets in Russia, 2006 Sinopec the sold 51% to Roseneft approx. Purchased 50% of JSC Karazhanbasmunai of assets 2006 CITIC Resources Holdings in Kazakhstan Purchased 51% in Seram block in Indonesia through 2006 CITIC Resources Holdings acquiring the asstes from KUFOEC Purchased oil sands projects by acquring 50% of 2006 Sinopec Ominex de Colombia with ONGC Purchased 50% interest in Northem Lights oil sands 2005 Sinopec projects approx. Purchased 38% of Al Furat Production Company 2005 CNPC (50%) and ONGC from PetroCanada Purchased 14.15% stake in MEG Energy for oil sand 2005 CNOOC business Purchased bloack 18 (Angola) from Angolan 2004 CNPC goverment when Shell exited Angola Purchased petroleum assets from First International 2004 Sinopec Oil Corporation in Kazakhstan Purchased 16.93% interest of Tangguh LNG project 2003 CNOOC from BP and then sold 3.06% to Talisman Purchased 100% Atlantis from Norwegian Petroleum 2003 Sinochem Geo-Service (PGS) Purchased 14% interest in block 16 in Ecuador from 2003 Sinochem ConocoPhillips Purchased Devon Energy Corporation for six blocks 2002 CNPC / Petrochina in Indonesia Purchased YPF Repsol's upstream assets (southeast 2002 CNOOC Sumatra etc) in Indonesia FACTS Global Energy (2010); Interfax; company websites; CNPC Reasearch Institute of Economic % Technology (2010); IEA researc Source: (Jiang & Sinton, 2011) Table 4 adds the investment activities of all China s investment vehicles such as financial corporations and smaller oil companies, and we see a similar picture as above. Africa is well represented among the top twenty projects China has abroad in Out of the 31,444 million USD investments to coal, oil and natural gas 21

33 listed, 13,712 million USD were invested in African countries. Note also in table 4 that only four of the 20 largest projects took place before 2008, when the financial crisis hit. China clearly accelerated its hunt for resources after the crunch, launching China into what Jian calls phase four of China s transformation; the go abroad and buy phase. Table 4. China s top coal, oil and natural gas projects abroad Rank Country Year OFDI (million USD) 1 Vietnam Iran Cuba Nigeria angola Egypt Nigeria Niger Saudi Arabia Iran Sudan Oman Chad Syria Jian's calculations based on Finacial Times fdi Intelligence Data source: (Jian, 2011) CNOOC holds interests in oil and natural gas blocks in Algeria, Nigeria, Equatorial Guinea, Congo, Angola, Tunisia, Libya, Egypt, Uganda, Tanzania, Kenya, Ethiopia, and Madagascar (CNOOC, 2012). January 9 th 2006, it signed a definite agreement with Nigeria South Atlantic Petroleum Ltd to get 45% working interest in an offshore oil mining license OML 130 in Nigeria for 2,286 bill USD cash (Table 3) (CNOOC, 2008b). Production commenced in March 2009, and the field became the main driver of the company s overseas production growth that year (CNOOC, 2010a). In February 2006, CNOOC Ltd. signed a production sharing contract for Block S with Equatorial Guinea. In April that same year, the signing of a contract for six blocks in Kenya was witnessed by Chinese President Hu Jintao himself along with Kenyan President Mwai Kibaki in Nairobi. This was the first onshore oil exploration contract in Kenya since western companies pulled out in the 1990s, making Chinese NOCs first on the scene since then. The exploration was less than successful, however. In December 2007, one of CNOOCs subsidiaries secured a service contract for four onshore drilling rigs in 22

34 Libya, which was the company s first overseas onshore drilling contract (CNOOC, 2008a). CNPC has foreign exploration and production (E&P) assets in Iraq, Iran, the United Arab Emirates, Myanmar, Indonesia, Azerbaijan, Turkmenistan, Russia, Kazakhstan, Ecuador, Peru, Venezuela, Oman, and Canada, as well as in Algeria, Nigeria, Tunis, Libya, Niger, Chad, South Sudan and Sudan. Further international expansion is clearly in the cards according to BMI (2012) estimates, as CNPC is allowed focus on international projects while most of its domestic operations are conducted through its subsidiary Petro China. Its overseas production contributing 50 percent to the total output. SINOPEC is involved mainly in oil exploration and production in China, but they have significant crude oil production in Africa. It has recently signed with Ghana s GNPC for cooperation in the development of upstream, midstream and downstream oil projects (GlobalData, 2012b). In 2010 alone, SINOPEC signed nine new overseas projects, expanding oil and gas resources abroad rapidly (SINOPEC, ). Overseas crude production reached over 18 million tons, up 43,9 percent from In 2012 SINOPEC bought a 20 percent share in Nigeria s OML 138 block from Total for 2,5 billion USD (ICIS) Refinery investments and the downstream segment Not only within the exploration and extraction of oil, but also in the production of crude oil into refined products have Chinese NOCs been investing in abroad and in Africa. Chinese investments in the African downstream sector could reach more than 1,3 million barrels daily (mn b/d) of capacity. CNPC has invested in refineries in Chad, Niger, and potentially Egypt, Nigeria and Uganda. However, as we have already discovered through the trade data, little evidence points to any plans by the Chinese NOCs to refine oil in Africa for transport home, although some refinement is occurring for local sales. The NOCs seem to appreciate that building refineries locally shows commitment and gives the opportunity to respond quickly to local markets. In November 2009, CNPC and Petronas agreed to expand the Khartoum refinery capacity in Sudan by 50 thousand barrels daily by In exchange, CNPC will gain greater access to upstream projects in Sudan (Jiang & Sinton, 2011). 23

35 In addition, a reason for local refinery investment is that much of the oil found in Africa as well as in South American countries such as Brazil and Venezuela is of a type of crude that Chinese refineries cannot process. This has been confirmed by my Chinese subject-matter professional, who nevertheless added that in Venezuela s case, Chinese companies have built refineries locally that can process the oil and it is occurring on such a scale that it is economically viable to ship the refined oil all the way back to China. Petro China has also formed a joint venture with the Venezuelans to build a Southern Chinese refinery that can process the oil. In a government-togovernmental deal in 2008, a joint venture refinery was to be built in the Orinoco belt along with a fleet of VLCC oil tankers and a boost in Venezuelan oil exports to China. The refinery would be capable of processing the heavy oil found in South American offshore fields (GlobalData, 2012a). A similar situation exists in Kazakhstan, though the ease of pipelines and geographical closeness bring lower transportation costs here. Overall, little seems to be expected for growth in total African refinery capacity, however, as figure 6 shows. Refinery capacity in the whole African regions barely reaches 3,317 mn b/d in 2011, barely a third of China s capacity, and has been growing on a very slow rate. Africa s oil production lies far above the level at which its own refineries could process it, and is much more volatile than refinery throughput. This supports what we already now that Africa sends much crude oil abroad and processes little itself. At the most, in 2008 the production was 7,133 mn b/d higher than African refinery capacity. Whether China s refined oil is refined domestically or in other large Asian economies, we can probably expect that it is not, nor will it in the future, be refined in Africa to great extents. 24

36 Figure 6. African refinery capacity barely growing while production is volatile Data source: (BP, June 2012) Note from this figure what shall be discussed later under the attractiveness of the African oil markets, that African production is far higher than what is consumed of oil domestically. Much oil is as of yet available for export Investments in infrastructure In addition to investing directly in energy related fields, Chinese companies and financial institutions have also invested heavily in African infrastructure which benefits both the locals and their own companies doing business there indirectly. This is in contrast to traditional Western investors and donors who often focus on rural areas and agricultural aid that does not lead to modernization. In Ethiopia, for example, China s second-largest maker of phone equipment ZTE has helped build national phone and Internet networks with the local state-owned provider, and Chinese also help service it. This commercial sense for the companies involved by making Chinese and other foreign investments more profitable, but indirect state backing is also present in the form of a combined 45 billion USD credit line awarded them from the CDB. The benefits to local companies and populations of an improved infrastructure and a large manufacturing and export industry are undeniable. China Export and Import Bank funded a project for a road diversion to tie more cities to the capital (Sanderson & Forsythe, 2013). In Ghana, the CDB has financed roads, railroads, and an oil terminal and pipeline network with a three billion USD loan, the biggest in Ghana s history. Note that Chinese contractors would do most of the work. 25

37 Requirements of local content in the labour force is in fact an important factor in the decision of NOCs as to whether to enter a country. Chinese NOCs also give aid in Africa. In April 2008, CNOOC made a donation of 2,114 million RMB to Indonesia, Kenya and Equatorial Guinea, handed out school uniforms and drilled wells (CNOOC, 2009). 2.3 Mergers and Acquisitions When attempting to determine the degree to which Chinese oil companies are involved in African oil, it cannot suffice to look only at the deals made by Chinese NOCs directly, nor at only the oil shipped out of Africa by Chinese-flagged or owned ships. This because Chinese oil companies increasingly have been operating more discreetly through partners from other countries. While importing oil from abroad has been a short-term solution to meeting domestic energy demands, the NOCs having also been investing in foreign energy firms to establish long term and more secure energy supplies. M&A activity increased drastically for the Chinese oil companies during the period of the global financial crisis. In 2010 China had achieved a status as one of the world s biggest forces in mergers and acquisitions and the trend does not seem to have subsided, contributing to a complete re-shaping of the global oil industry. In 2011, a record 35 billion USD were spent by Chinese NOCs on buying foreign rivals, setting China on the track to producing enough crude oil outside its own borders to rival OPEC members such as Kuwait and the United Arab Emirates by If this streak continues, the International Energy Agency estimates that China s NOCs will produce three million barrels a day abroad in 2015, thus almost doubling their 2011 overseas output of just over 1.5 mn b/d (Rabinovitch & Hook, 2012). A further 57,2 billion USD were recorded on outbound acquisitions in 2012 according to DealLogic (Rabinovitch & Hook, 2012). Among the larger examples of China s NOCs global buying sprees is SINOPEC s 4,7 billion USD acquisition with French TOTAL in April 2010 of 9,03 percent of Syncrude, a Canadian oil sands company which is very big in Africa, from Conoco Phillips (GlobalData, 2012b). In another large recent takeover, SINOPEC Group took over Addax Petroleum Corporation in 2009 for 7,2 billion USD (Oster, 2010). Addax is based in Switzerland, listed in London and Toronto and is one of the largest independent oil producers in both West Africa and the Middle East by volume. Addax has exploration blocks in Gabon and Nigeria, which by extension means that the 26

38 Chinese companies are indirectly involved here. In addition to partnering up with oil companies from other oil-importers SINOPEC has partnerships with many oil-rich NOCs for downstream and refinery operations. It acquired a 55 percent stake in Sonangol SINOPEC International in March 2010 at 2,460 million USD for exploration in Angola. Sonangol is the Angolan national oil corporation. CNOOC has had some problems with its solo efforts in Kenya where its wells are coming up dry and pulled out in December 2010, but French Total and CNOOC bought a third of Tullow Oil PLC s assets in Uganda together that opened major oil fields a few years ago (Oster, 2010). Tullow PLC is also involved in Ghana. Petro China signed an agreement in January 2011 with Italian Eni, which could open the door for cooperation in Africa. It was also reported as wanting to secure domestic demand by speeding up overseas acquisitions. 2.4 Labour and Migration When asked whether they believed China was highly and increasingly involved in Africa and its energy markets at the beginning of each interview, practically all of my respondents with experience from Africa immediately pointed to the most visually evident sign of involvement recently; the massive influx of Chinese labourers and managers to Africa these past decades. While there is no way of proving whether it is the energy sector to which the migrants are heading, but we feel a short mention of migration patterns has its place in an investigation of present and future likely Chinese involvement in Africa. However, migration data for China is exceedingly difficult to come by. Even the World Bank can only give migration data between China and Africa up to the year 2000, and while it admittedly shows that vast amounts of Chinese have migrated to Africa thus far both to countries with which Chinese companies conduct manufactured goods business and to those with oil it is difficult to judge how reliable this data is. Up to 20,000 Chinese reportedly migrated to Congo in the 1970s and closer to 5000 moved to South Africa in 2000, and thousands moved to Kenya and Mozambique (WorldBank, 2013). The World Migration Report 2011 also speaks of a growing Chinese presence in both the Middle East and Northern Africa, though many of the workers may have been in Africa so long that they have become citizens and settled with children who are then not counted as migrants (IOM, 2011b). 27

39 PostDoc Heidi Haugen, for example, studying exports and migration between Africa and China, estimates that at least 100,000 and possibly up to a million Chinese live in Africa and that the numbers are increasing fast. Similarly, Peter Mellbye with his 30 years of experience within the Norwegian oil giant Statoil, along with previous positions within the Norwegian Ministry of Trade and the Norwegian Export Council has on his many visits to China and particularly in Angola witnessed the influx of Chinese labourers to the country and its energy sector. The migrants seem to cover the whole range of positions required from laying asphalt to managing the offices. Since the 1990s, contract labour has continued to form a significant part of movement overseas from China, and there were skilled migrants going on contracts to socialist African countries in the 1970s (Skeldon, 1996). According to their website, SINOPEC have 382 service teams with 18,764 people working overseas within oil and gas exploration. By the end of 2010, there were also 9065 managers and operators abroad within refining and chemical engineering projects (SINOPEC, ). CNOOC s oilfield services have also been dispatching more and more staff overseas along with its business expansion. In 2008 they sent 1,392 people abroad. By 2020, overseas personnel will take up 41.1% of all oilfield service members, they estimate (CNOOC, 2010b). 2.5 Empirical findings In conclusion to this empirical study we will highlight some main findings to be discussed and explained in terms of the internal and external factors NOCs face in the next chapter. First of all we have found that China imports large amounts of oil from abroad for domestic use only the US, Europe and Asia Pacific regions import more in global terms. China is highly oil dependent. Secondly, we have found that Chinese NOCs are increasingly involved in direct trade of African crude oil, and increasingly relying on African oil in relation to all other source regions apart from the Middle East the region expected to keep its clear priority still despite some African countries such as Angola catching up to for example Saudi Arabia. Thirdly, it seems a lot of Chinese involvement in Africa takes the form of investments and mergers with local or international companies that often do not translate into oil trade towards China. This may be puzzling in light of the need for oil at home. Specifically for the African continent we see investments in infrastructure and upstream oil is high and 28

40 increasing, in addition to some downstream projects for local supply. The fact that the NOCs increasingly choose to team up with others both at home and abroad is an important deviance from earlier methods of operation. Fourthly and finally, we have found overwhelming evidence that it is crude oil, not refined oil products that China sends out of Africa to international or domestic markets. The NOCs seem to prefer to reserve the downstream refining segment for within China. Investments in refineries in Africa seem only to occur when aiming for local markets refining of oil for Chinese markets is done closer to home in Singapore, South Korea and other large Asian economies, or within China itself. 29

41 3. Theoretical analysis of the internal driving forces behind the NOCs observed activities at home and abroad Having now highlighted certain main structural changes within the overseas investment and trade activities of Chinese NOCs, we must investigate the driving forces at the root of these. The forces involved are separated into internal and external factors. First among the internal factors is of course the state of Chinese oil reserves leading to a high dependency upon international oil sources for domestic consumption. Recent changes within the consumption structure of oil are related to the transformation of the Chinese economy and to increased urbanization. Second is the state of the domestic refining industry in China, which may cast light on the decision to keep refinement of imported oil close. Third is the interplay between governmental policy on overseas investment and the commercial interests of the NOCs abroad and at home. Fourth comes state regulation in the domestic fuels market and its influence on the marketing of refined oil products, and finally we study the structural changes of the domestic competition in Chinese oil markets and the effect this has had particularly on the downstream segment investment of the NOCs the portion of their business structure we have determined is kept mainly within China itself. 3.1 Increasing Chinese oil dependency Explaining China s observed high imports of oil from abroad is easily done by looking at its growing inability to satisfy domestic oil demand from its own resources and production. Worldwide, about 88 million barrels of oil are produced daily, and China alone consumes about 9,8 of these (BP, June 2012). Figure 7 shows that China now is among the larger oil producers in the world but consumes many times more both in relative and absolute terms. In 2011, China s oil production was five percent of global production, amounting to 204 million tons, while its consumption stood at 11 percent of the total, at 461,8 million tons (ibid; author s calculations). 30

42 Figure 7. The distribution of global oil production and consumption Data source: (BP, June 2012) We can see clearly that while Chinese oil consumption has risen steadily since the 1960s and quite dramatically since the economy took off in earnest; its oil production has seen nothing like this increase and remained quite steady for the past two decades or so. Few new domestic onshore of offshore oil finds have been made and China s oil fields are aging. The United States also stands out as a highly oil-dependent country. Note that it is mainly the highly developed industrialized countries that 31

43 consume the largest part of the world s oil, interspersed with the particularly populated ones of India and Saudi Arabia for instance 5. Over more than two decades, China s oil demand growth has been consistently strong as the economy has rapidly expanded; as mechanized transport use and the petrochemicals industry has increased. As can be seen in Figure 8, China s oil selfsufficiency ended in 1993, and it was forced to begin importing oil from abroad to meet the growing domestic demand. Imports leaped after the accession to the WTO in 2001, also discernible in the figure, allowing for excessive oil consumption despite low domestic production 6. Figure 8. China s oil dependence Data source: (BP, June 2012) 7 Furthermore, we can see a leap in imports around the onset of the global financial crisis in this figure. Perhaps counter-intuitively, the 2008 crisis actually increased the demand for imported energy resources into China to such a degree that 2008 became the first year when oil imports exceeded domestic oil production, as Figure 9 shows. 5 The initially puzzling switch between Other Europe and Eurasia and Russian Federation in the 1980s is of course a result of the collapse of the Soviet Union and a redefinition of borders. 6 Figure 20 in the appendix confirms these results for total energy consumption and production put together by China s National Bureau of Statistics and given me by the Norwegian Central Bank. 7 Includes crude oil, shale oil, oil sands and NGLs (the liquid content of natural gas where this is recovered separately). 32

44 The effects of the crisis on China s demand and ability to satisfy its energy needs must and shall be discussed in detail in the next chapter. Figure 9. Oil imports into China versus domestic production Data source: (BP, June 2012) 8 It is interesting to note that there was a time between 1974 and 1993 according to this graph that China actually had sufficient excess oil production to export some oil abroad. Most went to Japan, but the government also released increasing portions in the 1980s on the international spot market and sent some to Singapore for refining. Though recent demand trends have been erratic, long-term forecasts for oil consumption suggest that demand could reach more than 13,35 mn b/d by 2021, though perhaps slowing a little as the Chinese economic growth stabilizes and energy efficiency improves (BMI, 2012, p. 9). As medium- to long term domestic production is declining, this could mean that China must import up to 8,9 mn b/d by 2021 (BMI, 2012, p. 9). China is expected to import around 79 percent of the oil it consumes by 2030 (GlobalData, 2012a). To look closer into the drivers of domestic oil demand, we separate the demand into sectors in Figure Imports are author s calculations and assume no storage 33

45 Figure 10. Chinese energy demand by sector over time (NorwegianCentralBank, 2012) (NBS, 2012) Stimulus spending on energy-intensive infrastructure has stimulated heavy industry output and industry is by far the largest consumer of energy in China, though household consumption and transport are major players also. When it comes to the consumption of petroleum specifically, industry is again the major consumer followed by transportation, telecommunication and postal, then agriculture and finally construction and household consumption. Thus, farming is a larger consumer of the petroleum market than it seems looking at the total energy market, as seen in the figure 11 below. Demand across the basic chemical industries is expected to maintain strong growth momentum and oil-consuming infrastructural industries such as automobile, aviation and marine transportation sectors will continue to expand medium- to long term, both to satisfy domestic demand and international demand for Chinese manufactured goods. 34

46 Figure 11. Chinese oil demand by sector over time Data source: (LBNL, 2008) 9 Looking to China s potential to satisfy its growing oil demand domestically, there have been some oil discoveries recently; one in 2006, two in 2008, five in 2009, 3 in 2010 and one more in 2011 (GlobalData, 2012a). Six of the above were in Bohai Bay, three in the Pearl River Mouth and one in Beibu Gulf. Only four are so far in operation. The forecast of domestic production in 2016 is 992,89 million barrels annually (author s calculation). We see that this is nowhere near sufficient to satisfy the forecasted demand. This has to do with the extent to which reserves can give enough production to satisfy demand, and a method by which to estimate this extent is to calculate the reserves-to-production ratio that gives the length of years remaining that reserves would last if production continued at its present rate. Author s calculations of these based on data from BP (June 2012) are presented in Figure 12. We see that China has a very low R-P ratio which has been declining since the 1980s despite recent finds. In 2011, the ratio is at 9,86. While having the largest crude oil reserves in South Asia, China experienced a decrease from 24,000 million barrels in 2000 to 20,350 million in 2011 at an average annual growth rate of -1,5 percent (GlobalData, 2012a). The jump in South America s ratio is thanks to recent finds in Venezuela and Brazil, and the same is true for oil sands found in North America. Note 9 * million tons of coal equivalent divided by 1,43 35

47 that the Middle East is exploiting its oil fields faster than it can find new ones, while the opposite holds true for Africa, though to more modest degrees. Figure 12. The low Chinese reserves-to-production ratio Data source: (BP, June 2012), R-P ratio is author s calculation Adding to its supply uncertainties, China is one of a few major oil importers that does not have a Strategic Petroleum Reserves (SPR) program of mandatory stocks of oil stored to mitigate short-term price shocks. Most countries in the OECD maintain mandatory stocks equivalent to at least 90 days of net oil imports. The United States SPR is slightly lower (Jian, 2011). Construction of sorely needed SPRs was begun in 2004 in Zhenhai, Zhoushan, Huangdao and Dalian, and according to a plan released by the National Energy Administration (NEA), China will build eight new strategic SPR bases in addition to the current four by 2011, increasing China s strategic crude capacity from 103 million barrels to 281 million barrels. Oil is estimated to account for about 20 percent and imported oil about 10 percent of China s total energy consumption (Jian, 2011). China will continue to be increasingly dependent on oil imports according to this analysis. Thus, the decision of where to import this energy from, where to invest energy funds and with which foreign oil companies and governments to form partnerships is a crucial question of energy security. 3.2 Overcapacity and continued expansion of Chinese refineries Having explained through the state of Chinese falling reserves-to-production ratios and production to exploding domestic oil demand comparisons why China imports so 36

48 much oil from abroad, we look further into the fourth finding of the empirical study that China mainly imports crude oil from Africa as indeed from most of its source regions apart from some large Asian economies such as Singapore and South Korea. We begin by investigating on the capacity of domestic refineries in China and see in figure 13 that China has a very high refinery capacity compared to other regions. In 2011, its contribution to Asia Pacific s total refining capacity was as high as 31.4 percent, and with rapid expansion Chinese capacity has even outgrown that of the Middle Eastern region after 2005 (GlobalData, 2012a). Domestic refining is dominated by CNPC (through its subsidiary Petro China) and SINOPEC, which account for about 3.03 mn b/d and 4.39 mn b/d of crude distillation capacity respectively. Total capacity is significantly larger, with a 2011 figure of 10,8 mn b/d, due to the presence of between 60 and 100 teapot refineries, too small to register on most surveys. Figure 13. Chinese refinery capacity accelerating, taking the lead Data source: (BP, June 2012) Global Data (2012) places domestic refining capacity expansion at an annual average growth rate (AAGR) of 7,5 percent between 2005 and Capacity is further expected to increase at an AAGR of 6,6 percent up to 2016 as Table 5 shows. Of the 632,3 MMTPA (million metric tons per annum) capacity expected in 2016, SINOPEC is estimated to hold 313,9; and Petro China 216,5; CNOOC Ltd follows at a meager 25. Such a high expected growth in domestic refineries suggests the unlikelihood of allowing refining of oil for domestic use to occur abroad, such as in Africa, and leads us to expect that oil imports into China will continue to be in crude form. 37

49 Table 5. China, Refinery capacity forecasts by company (MMTPA) Source: (GlobalData, 2012a) Growing capacity, however, is no guarantee for growing production. As Figure 14 illustrates, overcapacity in Chinese refineries is extremely high and growing. We see that throughput of crude oil used in Chinese refineries has been less than the capacity ever since the 1980s. Oil production has been included in the figure to show that the oil produced overall is far below both the consumption it should satisfy and the capacity available. Oil consumption lies very close to refinery capacity, perhaps explaining to some degree the high investment in refinery capacity technically Chinese refineries may be able to satisfy domestic demand with enough crude oil inputs. This partly explains why China prefers to import mainly crude oil from sources such as Africa it prefers to fill capacity of its domestic refineries instead of building new ones abroad. Figure 14. Overcapacity of Chinese refineries Data source: (BP, June 2012) 38

50 We know from the trade data above, however, that a large portion of domestic demand for refined petroleum products is actually satisfied from abroad, particularly from South Korea and Singapore. This may seem puzzling as there is excess refinery capacity at home, but may be partly explained by looking at the specific composition of the Chinese imports of refined product. As Figure 15 shows, the refined product China buys from abroad is mainly fuel oil, something of which it produces little itself as we saw in Figure 5. Chinese refineries mainly produce diesel oil and gasoline. In 2011, China imported 250,000 barrels daily of fuel oil (IEA, 2012a). Chinese NOCs are also invested in refineries in Singapore and South Korea themselves. Figure 15. Composition of Chinese oil imports Data source: (LBNL, 2008), Chapter 7 CNOOC is responsible for the largest single train refinery in China and the first specially designed to process high acid heavy offshore crude in the world. Huizhou Refinery Project is the first large-scale downstream project solely invested in by CNOOC and was put into operation in May The largest refinery in China based on distillation unit capacity is Zhenhai Refinery, owned by SINOPEC, and SINOPEC is also the company with the largest domestic refining capacity overall (GlobalData, 2012a). There are 54 active refineries in China in July 2012, and 8 planned projects (ibid.). See Table 8 in the appendix A3 for a list of the main domestic refineries, their owners and capacity

51 3.3 The interplay between governmental policy and commercial interests Most of my interview subjects initially responded in terms of government policy when asked whether they believed China would increasingly be looking towards Africa for future oil needs and why. Much commentary regarding overseas activities of Chinese NOCs presumes that the companies are acting under direct instruction and in coordination with the central government. There can be no doubt that the Chinese government has a larger hand in the decision-making processes of its oil enterprises, financial institutions and even private actors than most national governments can claim. The expectation at the outset of this research was to find that Chinese involvement in Africa would be increasing rapidly as Chinese oil companies respond to the surging domestic energy demand as the Chinese economy grows, and that all the oil would be transported home to China where it is sorely needed. We have found that the latter is not the case, and it is also possible that the decision of which source region to approach for oil is also not government mandated, and so we must look deeper into the relationship between the central government and the NOCs to explain their behaviour. Starting from the study of official policy, scouring the 11 th and 12 th five-year plans for energy security and oil activity paragraphs revealed mainly general and overall targets and intentions instead of specific guidelines. The 11 th plan did deviate from its predecessors by prioritizing the expansion and security of domestic energy supplies, and energy security was a clear theme. However, it did not discuss focusing further on foreign energy sources as domestic supplies grew uncertain (Jian, 2011). From the 2011 annual report of CNOOC, we can read that the progress in their globalization drive, energy conservation and emission reductions were all inspired by the targets set for the company under the 11 th five-year plan, but that no quota was set centrally for what to do with the oil and other energy resources obtained abroad. The 12 th plan released July 9 th 2012 represents, rather a step towards greater emphasis on internal markets and domestic demand in China than international focus, though deepening international energy sources in mentioned. The energy sector is mainly indirectly influenced by the plan s emission targets that will fall disproportionately on this sector. An explanation of a preference for shorter shipping routes to sell African oil closer to its extraction point instead of shipping it all the way to China may be found in the growing concern with CO 2 footprints. The plan calls specifically for an 40

52 increase in non-fossil fuel use to 11,4 percent, a reduction in energy use per unit of GDP to 16 percent and a reduction of CO 2 emissions per unit of GDP to 17 percent (KPMG, 2011). Energy security is not highlighted nor addressed in detail, but it is clear that it will continue to be a top priority. There is an emphasis on boosting investment in the domestic offshore industry in general and to increase offshore oil production by 100 million barrels during the period of the plan. There is a strong, but vague, goal for the national oil companies to become world-class and internationally competitive (CNOOC, 2011). The plan also affects the NOCs decision-making process through its influence on the transport and logistics sector. Immediately following the release of the plan, shipbuilding companies listed on the Chinese stock exchanges could be seen to gain in value. In addition to this, the plan s focus on increased domestic consumption, infrastructure and urbanization are likely to contribute to higher energy needs overall, certainly expanding the NOCs domestic demand potential. McKinsey Quarterly predicts steady growth in the large state-owned enterprises that manage national infrastructure networks as the plan bodes strong government support and urbanization. Foreign companies are also increasingly allowed into the domestic logistics industry, creating a favorable environment for profit growth and investment. Diversification of income sources among the energy resources can be said to be influenced by recent governmental policies, however, as the NEA for example released a plan to increase gas use to 8,3 percent of the total energy mix by Business structure diversification is also encouraged by the plan, calling for the layout of crude oil processing capacity to be optimized to promote integrated development of upstream and downstream industries. This may partly explain the recent expansions in refinery capacity by the NOCs shown above in Figure 13 and their focus on becoming integrated energy companies through investments not only in upstream operations, but also downstream refining in China, other Asian countries and some oil-source regions. In addition to the five-year plans, the government s general Going Abroad policy of the last decades has clearly enabled companies to gain support centrally to sign longterm supply deals, build transnational pipelines and establish political backup for investments in risky countries such as the Middle Eastern and African oil nations. However, Jiang and Sinton (2011) suggest that the order of events is actually the complete opposite of what they may seem. It was, in fact, the NOCs themselves that 41

53 through commercial considerations decided to expand internationally in the 1990s with CNPC taking the lead and investing in Sudan and Venezuela in 1996 and in Peru in CNPC did not gain government approval for this, state planners took little notice and did not see overseas upstream investments as a sound strategy to meet growing domestic demand. After the WTO accession and growing concerns about rising oil imports took hold in 2001, the idea of creating national enterprises that could be internationally competitive gained ground and the Going Abroad Policy was actually the ratification of the NOCs early efforts to invest abroad. As for the Chinese banks CDB and CEIB (China Export and Import Bank), the Going Abroad Policy is not the primary driver behind their overseas investments either, according to the authors. Though traditionally classified as policy banks, the two are today like any other commercial banks, and highly experienced in overseas investments for commercial gains. It cannot be denied, however, that the dealings of the national banks are more political than those of the NOCs, and certainly on large scales and highly visible. Despite the ambiguity of some of the specifics of the five-year plans regarding oil trade and investments, China s state-owned energy companies do have a mandate from Beijing to achieve annual production targets, emission reductions and certain investments, and the top leaders of the NOCs are also political figures themselves well aware of overall goals. In the bureaucratic ranking system of the Chinese government, CNOOC, CNPC and SINOPEC are all at ministry level, operating directly under the State-owned Asset Supervision and Administration Commission (SASAC) itself. High-level managers of the two are appointed by SASAC, though not the top leaders; this is done by the Organization Department of the CPC itself. These heads of NOCs are also alternate members of the 17 th CPC Central Committee, which consists of the 371 most politically powerful people in China. We see then that the top executives of these NOCs must think both of their political responsibilities and the commercial interests of their companies. If able to fulfill the goals of their political comrades they have leverage in bargaining for future promotions, but on the other hand, the commercial incentives of oil companies may occasionally come at odds with these. CNOOC s annual reports make this duality very clear. In listing its company s goals and priorities, we see active implementation of national policies and safeguarding the security of the nation s energy supply, ensuring steady supply of 42

54 energy to the market alongside participate in the formulation of national policies, laws and regulations related to energy through to maintain and add value to stateowned assets (CNOOC, 2012). In a recent address, the Chairman of SINOPEC shows his company s goal not only for profit, but for promoting the smooth running of the Chinese economy by taking measures to secure fuels supply in agricultural consumption peaks in the summer and autumn and disaster relief (SINOPEC, ). CNOOC also ensures on their website that it have actively performed its responsibility of guaranteeing oil and gas supply to state and society, referring specifically to the 12 th five year plan, while at the same time reveling in the financial performance of their business. Due to this duality of incentives within the oil companies, having to meet central policy while at the same time functioning as commercial entities in their own right, China is one of the least predictable countries in terms of energy trends. Oil demand growth, which should generally match or exceed underlying GDP expansion, is erratic thanks to government policy that has been known to periodically clamp down on imports. Shifting price control measures and variable taxes add an additional layer of complexity. The rate of output growth is also determined by domestic company spending and is therefore influenced by government policy as well (BMI, 2012). However, when it comes to the day-to-day workings of the NOCs, the specifics of where and how to invest and pursue oil overseas, and even the amount of that oil to send home and in what form is much more up to the individual company than one might think. As China s energy consumption has soared above its production abilities in recent decades, so has the financial and economic might of the NOCs and their ability to lobby for more influence. In the past decades there has been a great shift in power, resources, personnel and knowledge from the government to NOCs. While the National Energy Administration (NEA) and the NDRC retain powers of approval over investment projects and NEA certainly has power over domestic fuel prices, the institutions are, along with the other agencies the NOCs answer to, in many cases politically weaker than the big state-backed and commercially profitable companies themselves. The NEA was created in March 2008 to attempt to create a body with the authority and capacity to formulate and implement policy on a national level. Critical functions, however, have been held in the NRDC and other bodies so that in practice the NEA has done little to simplify or optimize the country's energy bureaucracy. 43

55 Reform and restructuring has resulted in a tangled web of more than a dozen regulatory bodies whose conflicting goals and capacities have often impeded progress in the formation and implementation of policy. As a result, the NOCs have been able to take the lead in initiating major projects and policies at home and abroad and are relatively free to pursue their own commercial interests. As one expert I spoke to put it, the NOCs follow governmental policy when it is beneficial to do so, and the rest of the time they focus on profits. In some cases, government-to-government deals such as the ones with Russia, Angola, Venezuela and Kazakhstan require deeper cooperation between central authorities and the NOCs. These are long-term, often five year contracts specifying price and volumes to ensure steady supplies from abroad, and are usually also part of larger packages of other non-oil related agreements. Such deals are not part of Norwegian Statoil s business model nor those of many western companies. The bottom line, however, is that the NOCs are listed companies and so their main responsibility is to their shareholders and investors. Their focus is to increase production and reserves to boost their shares. The extent to which SASAC, the Stateowned Asset Supervision and Administration Commission, actually uses its rights of ownership to influence the NOCs has increasingly been put under debate in academic circles. Between 1994 and 2008, other than paying ordinary corporate taxes, none of the NOCs paid any of their revenues to SASAC or any other government ministry. This is starkly different from the NOCs operations of other countries and from China in the past a large portion of state revenues in the 1980s from the CNPC. After a push by SASAS, the NOCs now pay 10 percent of after-tax earnings to SASAC since However, that same year there was a 10 percent decrease in corporate income tax that offset this (Jiang & Sinton, 2011). Another important channel of governmental influence must also be discussed in the light of the puzzling overcapacity and continuing expansion of Chinese refineries that we highlighted in section 3.2. A suggestion from the Chinese subject-matter professional we talked to is that a reason behind the expansion of each individual refinery which in combination with the others creates the seemingly irrational oversupply is that local governmental departments have their own mandates about investing certain portions in the energy sector. As each is eager to fulfill their quotas, there is overinvestment overall in only this downstream segment. Jakub 44

56 Walenkiewicz, Market Analyst at DNV Oslo notes that a similar phenomenon can be seen in Chinese shipyards heavy expansion is under way, but there are not enough ships or orders to fill them all. He believes the main factor behind the expansions is a central wish to control the whole supply chain domestically. Jiang and Sinton s book discussed in the literary study to this thesis finds as he suggests that the segments in which Chinese NOCs overseas have the most independence are the upstream investments and operations, while refining, transport and pipelines are to larger degrees influenced by policy drivers and central incentives. Long term planning for potential increased energy self-sufficiency may therefore be a factor in the expansion of the refineries. 3.4 Regulations and price controls in the domestic refined oil and fuels market We see, then, that apart from on general expansion, emission and demand concerns, the NOCs are left relatively freely to pursue overseas oil interests as they see fit. Neither the location of exploration, refinement nor final sale is guided by specific state mandates. Thus it seems we must look to economic theory to explain first the decision to focus on Africa and the decision to leave refinement either to foreign buyers or domestic Chinese refineries. First, however, we cannot avoid a discussion of government price controls in the domestic fuel market when it comes to the decision to ship only a portion of African oil back to China and to even export some oil abroad. Price controls should be an important explanatory factor of these two findings. Chinese refineries are currently mandated by state to sell their refined products at low rates domestically, while forced to buy the crude feedstock at international high prices as so little is extracted from Chinese fields. Current price controls admittedly more responsive than those before early 2009 allow fuel prices in China to track a 22-day moving average of Brent, Dubai and Cinta oil prices, adjusted only when the movement of these three crude grades is four percent higher than the 22-day moving average. When the average is below 80 USD per barrel, domestic prices move relatively freely and refiners are expected to earn 'normal' margins. However, Chinese refiners cannot raise domestic prices when international prices move above 80 USD per barrel to prevent inflation, and are forced to take losses when price increases cannot be passed on to customers (BMI, 2012). In addition, the domestic fuel prices are regulated according to province and city in 29 different sections, making quite an 45

57 intricate system (LBNL, 2008). As figure 16 illustrates, the spot price has been above 80 USD per barrel both in 2008 when speculation pushed them up in the winter of 2007/2008, and 2010 and 2011, though it admittedly dropped significantly during the worst of the financial crisis 10. In 2011, however, the average was again as high as 106,53 USD (author s calculation). Prices seem to have reached their peak now, however, averaging at 94,2 USD per barrel in the third quarter of 2012 and 104 for the year 2012 (IHS, 2012). Figure 16. High in international oil prices give refinery and marketing losses (USD per barrel) Source: (IEA, 2012c) As long as the pricing situation remains and domestic fuel prices are not permitted to reflect international crude prices, refiners may be hesitant to expand or utilize China s refining capacity, something easily understood by the NDRC s recent announcement of a record-breaking 4,8 billion RMB loss in July 2011 in China s refining industry. China's biggest refiner, SINOPEC, posted refining losses of 12,2 billion RMB in 2011, and Petro China showed losses of 21 billion RMB (BMI, 2012, p. 9). In the third quarter of 2012, PetroChina experienced a 33 percent drop in net profits compared with the same period last year, despite strong revenue and oil production growth. It placed the source of the difficulties on the difficult balancing act it must obtain between the interests of shareholders and the interests of state 11. Following 10 Something of which the NOCs were quick to take advantage in their overseas purchases 11 Debate does occur on the likelihood of the efficiency of domestic refineries being a reason for recent losses. Eunice Tai of Statoil ensures us that most Chinese refineries are top-notch, however. NDRC, refusing to raise prices in 2011, blamed the losses on increased distribution costs within China. 46

58 state policy of supporting domestic energy needs can be costly and unpopular with shareholders due to price controls of refined oil products domestically and regulation on the sales of these. PetroChina reported a loss of 37,4 billion RMB in the first nine months of 2012 in its refining and chemicals businesses 12. It is not difficult to imagine that in order to avoid losses, the NOCs often prefer to sell the oil obtained abroad on local or international markets instead of bringing it back to Chinese domestic markets, or that they sometimes choose to export the oil they refine in China to other countries at higher prices than they could obtain domestically. CNOOC, the smallest of the main NOCs, is actually about to become the most profitable of the three, partly due to its focus on crude oil and thus its lack of exposure to the highly controlled domestic market for refined products. To obtain control of the national fuels market, the government does not allow any companies to sell oil in China without a license. Such a license requires registration of capital, steady oil supply, legitimate sales networks and other requirements. July 2007 the Ministry of Commerce announced that CNOOC s subsidiary CNOOC Refining & Petrochemical Ltd. and its sales subsidiary would obtain such a license for crude oil. According to WTO commitments, the domestic crude oil market opened to foreign capital 11 th of December Diversification thus became more likely in the future. Another six companies have recently been granted wholesale licenses for oil products (CNOOC, ). As to the likelihood of a loosening of the reforms, complete reform in the fuel price mechanism is unlikely to occur short term, as it could increase domestic fuel prices and threaten continued economic growth. However, between the beginning of 2009 and the fall to 2010, domestic product prices were adjusted nine times to reflect international prices more closely, aiding the NOCs profits somewhat, and they lobby hard for further loosening of the price controls. Certain increases to domestic fuel prices were made in the beginning of 2012 also, and certain government announcements point to intentions to further soften the control on the market in the near future. 12 On the other hand, the NOCs have historically benefitted from their semi-monopolistic position in China s oil sector, and despite the losses in the refining and chemical businesses, PetroChina did turn a high net profit overall Invalid source specified.. 47

59 3.5 Structural changes in the domestic oil market In many respects, China s NOCs are similar to other Asian national oil companies and will perform internationally as according to profit maximization just like all the others. However, the structure of the Chinese domestic oil market has served to make the Chinese NOCs rather a unique group. Initially, the niches of the NOCs were intended to give them virtual monopolies within their own fields and provinces. CNOOC was established by the government in January 1982 and granted the exclusive right of conducting oil exploration, development, production and selling and completely taking charge of the business of exploiting oil resources in cooperation with overseas partners offshore. CNPC was established September 1988 on the basis of its predecessor, the Ministry of Petroleum Industry, supervising exploration and development of oil and gas resources within China. Originally, CNPC was mainly in charge of oil and has upstream operations. SINOPEC was established July 1998 on the basis of the former China Petrochemical Corporation and describes itself as functioning as a state-authorized investment organization in which the state holds the controlling share (SINOPEC, ). The three main NOCs were intended to control different geographical areas; CNPC in northern China, SINOPEC in the South and CNOOC dominating offshore production. However, market reforms eventually blurred these boundaries both in terms of functionality and geography and competition quickly increased. The NOCs soon functioned in a combination of statesupport and shared oligopoly power over the domestic oil market and increased competition among each other both for international resources and marketing of their crude and refined products domestically. Our interview respondent with background in the Chinese oil and gas sector suggested that a large reason for the overexpansion of domestic refineries is probably the individual refinery owners wish to outcompete the others, rather than a collective action to increase capacity for export or long-term planning. Thus, they seem to have reached a prisoner s dilemma situation where everybody makes losses. Stringent environmental regulations in the Asia-Pacific region of late are pushing refiners to build complex refineries which are capital intensive and require long construction periods. In their government-supported positions, their losses are subsidized, though this cannot continue indefinitely. 48

60 A more recent development since the WTO accession has been increased competition in Chinese fuels markets as they were opened to competition from abroad in Major IOCs, international oil companies, are already developing fuels retail networks in conjunction with SINOPEC and Petro China. British Petrol (BP), ExxonMobil and Shell are all building world-scale petrochemicals capacity in China in conjunction with domestic companies. French Total s has a minority stake in Zhanjiang Petrochemical Project, purchased from Kuwait Petroleum in March 2012 (GlobalData, 2012a). The Chinese NOCs are moving fast to establish a stronger grip on the domestic distribution systems and losing profitable market shares to their international rivals. They also face higher competition especially from refined and chemical product sales from South Korea, Singapore and Japan, as non-tariff and tariff barriers to trade are decreased. As their oligopolistic power is threatened at home, and as they increasingly move into international upstream and downstream activities, the Chinese NOCs are transforming into more what might be described as IOCs. This implies overcoming the deficiencies they have allowed themselves as protected state entities, such as low levels of technical expertise and little experience with deep-water drilling and international business. Chinese NOCs themselves comment on having to learn and adapt when doing business abroad as they do not there have the oligopolistic status they have at home. Backing from the government is also not a universal solution in international investments. An interesting phenomenon has emerged as a response to this state of affairs. As the empirical data on mergers and acquisitions showed, there is a developing a trend of China s state-run companies teaming up with large IOCs and NOCs abroad on foreign projects. Access to foreign technology is a motivator, as for example CNOOC admits inferiority internationally in technology, management and talent in its annual reports (CNOOC, 2008b). Especially in deep-water exploration do Chinese companies lack technical expertise, which is why CNOOC is for example working with French TOTAL in Nigeria s deep water fields and Chinese are partnering with BP to farm stakes in deepwater operations outside Angola. Chinese oil is typically in shallow water and easy to extract. Equity oil shares where it is not Chinese NOCs that are responsible for the operation of the oil exploration, extraction and production, accounted for about 50 percent of the NOCs foreign oil production in 2009 and is projected to top two mn b/d by 2020 (Jiang & Sinton, 2011). Making Chinese and 49

61 international oil companies more dependent upon each other s successes through partnerships ties China s energy security neatly in with the security of global energy supplies something that is to the benefit of both the government and the NOCs. We see that recent structural changes in China s domestic oil market can explain this mode of operation abroad of increasingly pairing up with international partners. There are also certain characteristics that the NOCs have obtained as a result of internal conditions that make them particularly attractive to foreign partners. The appeal in addition to cheap labour, supply and cash comes from China s innate long-term focus on the price and supply of energy, an ever present way of thinking that gives the Chinese NOCs more tolerance for lower profits short term and for doing business in risky areas increasingly successfully. Chinese oil companies are also known for being good at reviving aging oil fields something they have been forced to learn at home - and building large engineering projects. As a result of the location of Chinese oil fields, China is the biggest global shipbuilder for vessels for transport in shallow waters. These characteristics may explain how China has managed to become a large force in global merger and acquisitions deals. 50

62 4. Theoretical analysis of the external driving forces behind the NOCs observed activities at home and abroad Through our study of the factors internal to China that have been influencing the NOCs activities, we have been able to explain why China is such a large importer of oil, and partly why most of the oil is imported in crude form. We have discovered why the mode of operations abroad has increasingly been to team up with foreign partners, partly explaining why much of China s foreign oil acquisitions do not end up being transported back to China. The Chinese equity oil may not be under Chinese marketing control. We must look to external factors, however, to further explain the preference of transporting crude instead of refined oil back to China, and to explain the increasing dominance of particularly African oil in Chinese investment and direct trade involvement. External forces will also explain why the Middle East is still likely to remain China s main import source region, and why a certain amount of diversification is always expected in an international resource portfolio, so that involvement in South and Central America, the Middle East, Russia and Central Asia is always be pursued in addition to the newer African markets. 4.1 The African upstream market The African oil market is increasingly attractive to the Chinese NOCs for most of the same reasons that it is a new hot-spot for all oil companies and importers at the moment. In China s stage of rapid development it needs to finance its exports and secure raw materials for imports, and with the ever pragmatic economic rationale for which China has become famous, Chinese companies and governmental attention will go where it is profitable to do so. Right now, as Peter Mellbye puts it, that place is Africa. Norway and Statoil have long had great success on the continent and in its long and substantial involvement in Angola. Hugo Harstad, current Vice President DPI of South America and Sub-Saharan Africa in Statoil, agrees that the simple fact that investment opportunities are greater in Africa that anywhere in the world presently is proof enough that China will be doing its best to enter it along with everyone else. Little oil exploration has previously been done in many areas of the continent. 51

63 The African countries together hold about 8 percent of global oil reserves as Figure 17 shows 13. This is compared with Russia s five percent, Central Asia s 1,8 percent and South and Central America s 20,4 percent. The Middle East holds over 48 percent and China about one percent. Already it is not surprising that China s main import regions are the Middle East, South America and Africa, and why the Middle East has historically had such a preference. Remembering the ratio of reserves to production from Figure 12, we know that while the situation for most of these regions is a declining ratio, recent discoveries of oil in Africa along with still modest production are actually causing the ratio to increase, making involvement on the continent an attractive prospect. Admittedly, South America s R-P ratio has increased drastically as a result of Venezuelan oil finds, but as shall be discussed, this oil is has very different characteristics from the African. Figure 17. Global oil reserves by country Data source: (BP, June 2012) 13 Reserves here include gas condensate and natural gas liquids (NGLs) as well as crude oil 52

64 Knowing now the reserves present in Africa, one must consider the extent to which they are available for export. Figure 6 in the empirical chapter has shown how Africa as a whole produces far more oil overall than is consumed on the continent. We see that internal consumption has increased steadily since the 1960s as the economy of African countries has slowly improved, although consumption as a whole has barely reached 100 million tons which seems miniscule considering that China s alone consumed over 450 million tons in 2011 (Figure 8). However, while Africa, North America and Western Europe are expected to record flat growth in oil consumption through 2013, Latin America and Africa are forecasted to register the highest levels of growth (BMI, 2012). Knowing the way Chinese energy consumption exploded as its economy took off one might in fact hope for Africa s sake that the same occurs there. As to African production, there have been marked bursts and slight slumps as Figure 6 shows the most recent perhaps reflecting the consequences of an extraordinary find outside the coast of Ghana in See figure 21 in the appendix for corresponding figures for the Middle East, South and Central America, and Russia for comparison. While Africa in 2011 has 259,1 million tons more produced oil than is necessary for consumption, the Middle East has 930,4, Russia 375,4 and South and Central America 90,7 million tons available for export. Growth in African production is forecast to continue beyond the end of the decade as Africa plays an increasingly important role in supplying oil to the US, Europe and Asia, and so its attractiveness to the Chinese NOCs is undeniable (Mackenzie, 2013). Moving on to the distribution between African countries, Figure 18 we see that certain countries are disproportionately blessed with reserves significantly above their neighbors. Libya, Nigeria and to a lesser extent Algeria had already in the 1980s been established as highly oil-abundant, and recent exploration and finds in the former two have increased their proven reserves impressively since then. Angola has also experienced increases in proved reserves particularly after 1992, placing it above Algeria after In addition to proven crude oil reserves in Africa, Reuters estimates a further eleven emerging and potential oil producers with a total of 15 billion barrels of potential reserves between them, major among which is Ghana with estimated 3,21 billion barrels, Somalia with 4,02 billion barrels, Mozambique with 3,03 and Uganda with 2,06 (AfricanDevelopmentBank, 2010). 53

65 Figure 18. African oil reserves by country over time Data source: (BP, June 2012) West Africa, to which belong the major oil producers Angola, Gabon, Chad and Nigeria, Côte d'ivoire and Equatorial Guinea, with Ghana being the latest addition, was among the top 10 emerging exploration and production markets highlighted in a 2010 report by the strategic business intelligence agency Global Data. The region accounts for about 45 percent of total proved oil reserves in Africa (GlobalData, 2010) (see Figure 19 for a map of the continent and Figure 22 for an overview of production rates over time of specific African countries). Finally, it is not only the availability of so much oil in Africa that attracts the NOCs there, but the ease of extraction and the quality of the oil. The reservoirs and geology of the African fields are easier to handle than for example those in the North Sea, and we know the Chinese NOCs lack experience in difficult deep-water exploration. Brazil is an oil hot spot at the moment, but exploration involves top notch deep-water technology which is often beyond their capacity without partners. The oil found in Africa is also mostly top quality light sweet crude with low sulfur content, which is easier and cheaper to refine into gasoline or other products. The type of oil found is also a factor in determining where it is refined. If it is of a type requiring specified refineries, it will only make sense to refine it locally if enough is extracted to make investments in local refineries financially viable. If not, it makes more sense to collect the oil in larger refineries elsewhere. Peter Mellbye points out, however, that the types 54

66 of oil found across Africa are largely similar and most refineries can be adapted to process the entire spectrum, including Chinese refineries. This serves to support the finding that Chinese NOCs mainly export oil in crude form headed for its own or its neighbor s refineries. Under this section we must discuss the ease of investment in the African upstream market by looking to the economic state of some of the African countries. National and international oil companies have found that it is easy to find countries and states open to talk with foreign investors in African oil. Angola s economy is heavily dependent on its oil sector for gross domestic product as well as government revenues, and eager for infrastructural investments. Before winning its independence in 1975, a 27-year civil war destroyed much of the country s economy and infrastructure. Anticipating the Angolan government s thirst for development funds, China has offered billions of dollars in aid for various projects around the country, and by this method secured itself major oil deals snatched from under the noses of many other interested parties (Hurst, 2006). Nigeria is the top oil producer in Africa and currently ranks number 11 on global lists, but it still remains among the world s poorest countries. Government revenues therefore rely heavily on oil income and the state is eager to increase oil production rapidly. Oil export revenue volatility immediately reflects in the growth of the Nigerian economy. Algeria, a member of OPEC like Nigeria, is also recovering from long unrest and civil war, relying on export revenues from oil and natural gas with some success in its development process. It exports crude oil mainly to Western Europe and in particular to Italy, something for which European countries are highly grateful due to the high quality of Algerian crude oil and strict EU regulations on such. Ghana is a recent addition to Africa s main oil producers, as in June 2007 in the midst of escalating oil prices the British Tullow Oil and American Kosmos Energy announced a discovery of 600 million barrels of light oil off the coast of Ghana (Sanderson & Forsythe, 2013). This marked one of the biggest oil finds in recent times in Africa. Pumping did not begin until 2010 and so Ghana is not included in the above figure of Africa s main producers. Ghana is one of Africa s most successful democracies, and has achieved 5 percent economic growth yearly in the past 15 years. Thanks to international debt relief it managed to reduce its significant debt-to-gdp ratio from 120,5 percent in 2001 to 17,6 percent in China took a large part in this process, later forgiving 24 55

67 million USD of debt (ibid). There are fears that the recent spikes in apparent oil wealth might jeopardize Ghana s security situation, however, which means that also Ghana is highly dependent upon outside help to ensure a stable infrastructure and economic development. 4.2 Minimizing transaction costs and transport risks We have already noted the immense amount of money involved in securing oil resources for domestic use and building foreign resources. Among the main incentives for NOCs overseas investment is expansion of production to benefit from economies of scale. As to the choice of where to achieve this, as alternatives to oil are still limited, the most crucial method by which energy security can be ensured is a focus on cost reduction. We have found that oil from Africa is often transported only short distances to be sold on international markets instead of being taken all the way back to China, and that the purchase of refined oil for use domestically is done from Singapore or South Korea instead. We have also found that much oil involvement does not translate into any African oil being taken out by Chinese companies who remain mere equity investors. As there is no quota issued by the government to the NOCs regarding the amount of their equity oil they must ship to China, its marketing falls under commercial considerations and we shall analyze it in this light. The journey from Africa to Chinese ports is a long, costly and hazardous one, as Eunice Tai of Statoil point out. About half of the oil China consumes comes from abroad, mainly from the Middle East, Africa and Central Asia and recently also South America (Jian, 2011). This means that over 85 percent of it is being transported long distances in strategic shipping lanes such as the Straits of Malacca, Hormuz and Suez. The Malacca Strait that links the Indian and Pacific Oceans through which most shipments heading from Africa to China must pass, is troubled by piracy, a problem not expected to subside in the next decade at least as pirates adapt to sophisticated detection systems adopted on the ships (DNV, 2011). It is a long, narrow and extremely busy channel, less than three kilometers wide at its narrowest point, giving risks of oil spills and even blockage of transport lanes from shipping accidents. Attempts to reduce the share of imports travelling through the strait, if not the overall volume, can be aided somewhat by the Myanmar oil pipeline expected to become 56

68 operational in 2013 or It will link the Indian Ocean with Yunnan province. The oil must still be purchased in Africa or the Middle East, but can be transported more safely and cheaply on land, saving 1200 km of travel distance, and reducing China s reliance on the strait through which about 77 percent of its crude imports must pass. A side effect is that crude oil is transported directly to China s southwestern regions, opening opportunities for refinery activity here, something to which CNPC has already jumped. However, the fact remains that the route from Africa to China is much longer than that from Russia, Central America and certainly the large Asian economies of South Korea and Singapore. A further consideration is that within equity oil, the amounts of crude for which Chinese NOCs retain marketing rights may not be large enough to justify economically its transport on a large Chinese-owned tanker all the way home. The NOCs will then prefer to sell it closer to its source. In addition to explaining the mode of involvement of trade in African oil by the Chinese NOCs, considerations of transport costs and risks also serve to explain why diversification among its oil sources is economically rational. Transport costs also serve as the most important explanation of the finding we have made that crude is the main form in which oil is transported by most oil exporters and importers globally. The simple fact is that crude oil is easier and less expensive to transport that refined oil, and requires a type of ship that is easier to construct. 4.3 Overcoming regional political and security risks Between 1998 and 2003, nearly 60 percent of Chinese crude oil imports came from the Middle East, but in light of that region s current instability, China is focusing its efforts today on finding energy resources in other regions, such as Africa. Both the impact of the global financial crisis and recent turmoil in the Middle East and northern Africa have reminded Beijing of the importance of energy source diversification, and countries such as Angola, Sudan, Libya and Congo in Africa have been looked to in order to achieve this, in addition to Russia and Central Asia. This aspect of regional risk in the Middle East supports the NOCs movement into Africa. However, the African countries possess their own risks that must be dealt with. As we 57

69 shall see, Chinese companies may have advantages to this, partly explaining how China has become such an important part of the African oil trade. It is important to appreciate the very real security risks of some of the areas China enters, sometimes areas that for example the Norwegian oil company Statoil will not enter such as Sudan. They are also not allowed to enter Western Sahara, which is true for any company listed on the New York or Oslo exchange. Security issues both in the Middle East and Africa have repeatedly had repercussions on global energy markets, and has only recently in 2012 escaped the tight circle it was in due to disruptions in Libya and interruptions to output from other key producers experienced supply shocks due to Iranian sanctions, along with ongoing disputes around the secession in South Sudan. The first three months of 2012 had unplanned outages totaling 1,1 mn b/d due to technical issues, but also political and security risks in Syria, Colombia, Yemen and the Sudans (BMI, 2012). BMI is happy to report that Libya s output returned to its pre-crisis levels in 2012, eliminating one major supply risk at least, and IHS Global Insight (Oct 2012) notes that real GDP in North Africa is likely to return to its five percent growth rate due to the robust technical rebound in Libya in the success of bringing its crude oil production back up. Nigeria also presents significant security risks as its oil is not offshore as in most of the other African countries. The oil is underneath the swamps of the Niger Delta, which is densely populated and environmentally sensitive. The Nigerian government s own estimates state that about 45 percent of their oil is wasted or stolen, often by criminal gangs in the swamps. Sabotage occurs daily on oil lines and thieves tap into pipelines and divert oil into waiting tankers. China generally adopts a rather different approach than many Western countries, automatically giving it the advantage in certain often crisis-ridden host countries of low competition. An often successful tactic has been to acquire equity in foreign oilfields, thereby ensuring a solid source of oil, in addition to lowering the price of oil for Chinese companies there long run. Having permanent stakes in the oil fields allows for the overall strategy of developing long-term bilateral relationships based on trust and commitment (Hurst, 2006). This is part of the business strategy highlighted by many researchers to be slightly foreign to Western companies and governments. In my private conversion with a Chinese oil professional, he emphasized long term 58

70 relationships as an important factor behind China s success in risky areas, such as Sudan. BMI (2012) notes that China s willingness and ability to do business in countries where Western International Oil Companies (IOCs) have faced challenges to be an important reason for its success in recent international acquisitions. Hugo Harstad points out one obvious advantage that China has in gaining access to certain African markets, which is simply that is it willing to take the risks it brings both monetary and personal that others (Statoil and Norway included) are not. Thus, oil regions such as Sudan where Norway among others has decided not to enter are left empty and open for China. Nigeria has defaulted on its external debt five times since its independence in 1960, despite its substantial oil reserves (Sanderson & Forsythe, 2013), and CNOOC s exploration license there is threatened by this. Furthermore, militant activities in Nigeria have long affected the oil and gas operations of IOCs locally. Royal Dutch Shell Plc, the Chevron Corporation and the ExxonMobil Corporation have suffered attacks on plants and pipelines, deteriorating the midstream infrastructure. This sentiment is shared by the global media and researchers China has the resources and gumption to take risks. It is also often careful to tie their aid and investments to tangible collateral as insurance against losses. In Venezuela as in many of its oil-for-loans deals in Africa, the oil that must flow to China for years to come as stipulated in the contracts will come whether there is political and economical strife in the countries. Heidi Haugen of UiO adds that risks of certain countries can of course be reduced by spreading investments among several African countries, something the NOCs are doing. China is not the only country showing increased interest in Africa, and Business Monitor International (BMI) notes that persistently strong oil prices are prompting many producers to take riskier positions and maximize production in non-opec output. This is mostly evident in the steep production rise they expect 2013 particularly in emerging oil producers such as Colombia and Peru, along with Ghana and Cameroon in Africa. Risk management can also explain why the downstream sector is concentrated mainly within China itself. In the cases where domestic refineries cannot process the type of oil found, such as in Venezuela, the Chinese companies prefer building their own 59

71 refineries locally instead of using foreign-owned plants. Controlling as much as possible of the supply chain of energy resources is a way to ensure national security. 4.4 Diversification of overseas portfolio Many of my interview subjects emphasize that however much China seems to be moving into the African oil markets, it will always make sense both from the energy security viewpoint and profitability risk management to not place all eggs in one basket in Africa as Guo Jian formerly of CNPC puts it. He believes China is still likely to uphold its activities in South America and the Middle East, from which oil is transported by VLCC tanker ships, and in Russia and Central Asia from which pipelines are used. PhD Candidate Jonna Nyman at the University of Birmingham is kind enough to give her viewpoint on the path Chinese energy security is likely to take, and predicts that China will continue to invest in African oilfields, but perhaps more carefully than before, looking closer at the political stability of the states they invest in before making decisions. This is a lesson learned, she believes, after the Arab Spring, and after serious concerns about for example possible regime changes in Libya from which much oil is imported. Eunice Tai, currently in Statoil Business Development, but with seven years previous experience in the finance markets of Hong Kong and Singapore within mergers and acquisitions in the oil business, adds that a simple argument for expecting China to be prioritizing Africa would be diversification of energy sources to ensure higher energy security. The same argument would, she points out, require that other sources such as the Middle East and Russia not be disregarded, as diversification across the board is always advisable. The CNPC corporate strategy itself emphasizes endeavoring to maximize and diversify oil and gas resources (CNPC, ). CNOOC highlights a similar long-term strategy of achieving growth through offshore fields and geographical diversification of their portfolio (CNOOC, 2008b). 4.5 Uncertainties of international oil prices A clear argument for keeping as much as possible for the whole process of oil exploration, extraction, refining, transport and marketing within Chinese control is of course the uncertainties of international oil prices and exchange rates. This would explain to large degrees why much of the refining of oil for domestic consumption is 60

72 focused within China at least within Asia and why refinery capacity is being expanded to allow for further concentration of this segment domestically in the future. In the uncertain international oil market, the prices of crude oil depend on a number of factors within both supply and demand. On the supply side are weather conditions, political and economic stability in source regions, costs of exploration and productions and transport, foreign and domestic regulations and taxes and many other factors. Events in Egypt, Libya, Venezuela, Iran and Iraq have given uncertainty about oil supplies and a poor balance between OPEC and non-opec production discipline has given volatility. On the demand side, volatile environments in- and demand from emerging economies including India and China itself, have recently resulted in tighter oil supplies. Manufacturing and construction data from both the United States and China as major oil consumers are indicators of sentiment on recovery of the underlying economy and will influence the demand for oil. As will the high focus on energy efficiency and alternative sources of energy than oil, certainly within China as evidenced by recent five-year plans, but also in OECD countries. Dollar-denominated commodities like crude oil tend to move inversely to the USD currency, highly effecting price movements in major currencies such as the RMB. An interesting phenomenon has emerged since the early 2000s to combat this uncertainty, however, where commodities such as oil have gone through a process of financialization to allow diversification of portfolios and the idea that commodities provide a hedge against inflation. A result of investors increasingly trading in and out of oil as an asset class has the unfortunate result, however, of further adding to its price volatility. Chinese NOCs have been sighted particularly after the 2008 global financial crisis, to move increasingly into oil markets such as Africa s in order to invest in more stable goods than for example US treasury bills. Peter Mellbye believes, however, that tangible access to resources is probably a more important objective for Chinese investors at the moment than an abstract and long-term vision of security. Looking at Figure 16 above we see that a barrel of crude oil was trading at between 18 and 23 USD in the 1990s, rose to 40 USD in 2004 and further to 60 USD the next year. In the summer of 2007, 70 USD was reached and crossed the 140 USD per barrel mark in A terrible drop in prices occurred in 2009 as a consequence of 61

73 the financial crisis. Recovery began in the second quarter of 2009 and reached peaked in April 2010 before the recent new volatility spot crude oil prices again became unstable from May 2010 when the Euro zone debt crisis gave a meltdown in both financial and oil markets and in market sentiment. The pace of manufacturing growth in China had also slowed at this point due to government steps to cool the property market and curb bank lending further decreasing overall oil demand. Crudes such as Brent averaged 111,26 USD per barrel in 2011, an increase of 40 percent from its 2010 level. This was worsened by the loss of Libyan supplies along with smaller disruptions in several oil-rich regions, which pushed prices up despite large increases in production among other OPEC members and a release of strategic stocks from the International Energy Agency to attempt to adjust overall supply. While recent volatility and the discussion of oil price uncertainties speak for caution against such a high degree of dependence as China has on international oil markets, the positive consequences of the financial crisis on the overseas activities of Chinese NOCs turned out to be substantial. Here, the uncertainties of international oil markets predominantly worked in the Chinese NOCs favour. Jian, 2011, dubs this the beginning of the go out and buy phase of Chinese energy security, which was enabled by China s large foreign currency reserves, a fall in upstream capital costs globally, the renewed importance of monetary and financial stability illustrated by the struggles of other countries in the increasingly integrated global economy, and perhaps the wish to invest in natural resources and tangible assets abroad instead of for example US treasury bills that had now lost some of their image of absolute security. Along with these factors, the crisis made international credit markets tender, the prices of energy resources fell and national oil companies struggling to raise capital for exploration and production of oil on international markets were eager to accept easy credit lines from China. Central Asia increased its efforts to diversify export destinations away from the 90 percent reliance on Russian demand and looked to Chinese markets. Russian producers also wish to increase their customer base. While the crisis was raging across the globe, the West African nations combined announced 24 new oil and gas discoveries that few were in a position to claim except the Chinese NOCs (GlobalData, 2010, p. 160). On the consumer goods side of the spectrum, the crisis also contributed to strengthened ties between China and Africa as 62

74 Africa rose in importance to Chinese producers and exporters when demand for Chinese goods in the West fell (Lund, 2013). From Figure 23 in the appendix it is plain to see that China and the other BRIC countries suffered much less in terms of loss of GDP growth than other regions as a result of the financial crisis. When world oil demand fell 1,24 mn b/d in 2009, China s rose by 0,7, also seen in Chinese oil consumption in Figure 14 (Jiang & Sinton, 2011). In 2009 when most IOCs cut back on their investment spending, Chinese companies invested in 10 overseas acquisitions for a total of 18,2 billion USD (Jiang & Sinton, 2011). However, China s NOCs did feel the effects of the crisis as inflationary pressure intensified and monetary policy tightened domestically, while international oil prices fluctuated at a high level and market demand growth fell (SINOPEC, ). According to CNOOC Annual Report 2011, the company was under tremendous pressure of global inflation and cost increases (CNOOC, 2012). The recovery was quick, however, and while some may still be suffering under the financial crisis now, SINOPEC experienced a 51,9 percent increase in operating income from their exploration and production segment from 2010 to 2011 (SINOPEC, ). Throughout and following the global financial crisis of 2009, China has been taking advantage of lower commodity prices, the government striking a number of oil -forloans deals with affected countries. As oil prices fell in late 2008 and early 2009, China managed to buy significant amount of energy and raw materials when oil exporting countries hit by the crisis sought desperately for buyers (Jian, 2011). Oil exporting countries hit deeply by the crisis would be eager for buyers at this point and to accept oil-for-loans deals from the Chinese government while reluctant to sell their assets immediately. Successful negotiation of these deals in 2009 demonstrates the ability of the NOCs, Chinese authorities and financial institutions to quickly respond to the opportunities afforded by the crisis and co-ordinate such bundled package deals. China was quick to take the opportunity afforded by these factors to secure long-term access to foreign oil reserves much needed for its domestic growth. BMI (2012) finds China s strategic positioning and timing astute, allowing it to benefit from the tender state of the international credit markets, its cast foreign exchange reserves and the low oil prices to secure long-term access to foreign oil 63

75 reserves. China is expected to continue on this path to enhance its energy security medium-term, by offering easy credit lines to National Oil Companies (NOCs) struggling to raise capital on international markets to fund exploration activity (BMI, 2012). 4.6 South-South business relations internal and external factors giving unique Chinese comparative advantages to doing business in Africa As we now accept that Chinese companies are clearly taking large steps into the African oil markets as well as its manufacturing and trade markets, we cannot help but ask ourselves how it is that China seems to be doing to particularly well in these markets where many others have failed before them and are losing market shares to the Chinese now. Does China have some comparative advantage to doing business in Africa? If it is as the African contacts of Peter Mellbye says that many more people will be speaking Chinese than English here soon, and that Chinese migrants can be seen everywhere, what is it that has given China such an edge when the African market is clearly attractive to everyone? Norwegian Research Council Scholar Heidi Østbø Haugen emphasizes the understanding of informal agreements and networks based on personal trust instead of legally binding contracts as crucial components in the growing trade between China and Nigeria (Lund, 2013). Viktor Sinding-Larsen, Market Analyst of the Energy Markets in DNV s headquarters in Oslo, notes on similar grounds that DNV has little activity in or focused on Africa due among other reasons to issues of corruption and difficult communication and business thinking. There have been some attempts and small-scale projects in certain African countries, but cooperation has never taken on a significant scale. Another theory that has often cropped up is that African oil companies and governments alike may sometimes prefer Chinese partners to those of American or European background. In 2009, for example, the American multinational oil and gas corporation ExxonMobil had agreed to buy the 23,5 percent stake that private equity-owned Kosmos had in the massive Jubilee offshore oilfield outside Ghana. The field is believed to hold 1,8 billion barrels. However, the Ghanaian government expressed a wish for its own Ghanaian National Oil Corporation, GNPC, to get in on the deal, perhaps with China s CNOOC (FTenergysource, 2009). Nigeria has recently also been reported to favor Asian investors, as they are more willing than 64

76 their Western counterparts to offer infrastructure developments and other politically neutral aid in exchange for drilling rights (Hurst, 2006). Heidi Haugen informs us that the World Bank can no longer demand the same requirements behind their loans in Angola as earlier as China has become such a major giver and offers an alternative source of funds. In Ethiopia, Chinese construction firms have been busy for years, helping to build and fund the ring road in the 1990s, China Railway Group Ltd. is building an ambitious light-rail project, not to mention the massive new African Union building that construction firms made a gift of the biggest Chinese aid project in Africa since the Tanzam Railway in the 1970s (Sanderson & Forsythe, 2013). One can certainly speculate that such a preference may stem from the very different way Chinese companies do business. Informal contracts and long-term interpersonal relationships are common and valued in both business cultures to a much larger degree than in Western companies. It is also appreciated that the internal business dealings, government priorities and transparency issues are not put under scrutiny, but that China offers contracts simply based on profitability concerns. Chinese state officials are now stating that business relations between developing countries can take on different characteristics and levels of mutual cooperation than so-called North-South relations. China and African countries have maintained diplomatic and economic ties since the 1950s, something often upheld by economic grants, interest-free loans and preferential loans granted by China to the underdeveloped African nations who readily accept it along with strengthened ties with Beijing. Such ties could partly explain the fact that direct imports from Africa into China exceed imports from Russia although pipelines and geographical nearness stand in favour of the latter source region. In fact, the Russian government has been keen to diversify its customer base away from Europe, but negotiations with China have been long and marred by mistrust and pitfalls. Not until February 2009 did China through CNPC and Russia sign a long-term 20 year oil supply and pipeline access deal of 25 billion USD after many years of talks. Seeking diplomatic ties for trade purposes is not a method restricted to Chinese NOCs; Norway and Statoil for example have very well established ties in Tanzania, but it is possible that the Chinese companies with their state backing are able think even broader and more long-term to gain their contracts, however. 65

77 Peter Mellbye comments that such south-south trade is often hindered by poor bilateral relations and poor infrastructure. Without at least one partner with the necessary ports, airports and communication for trade, business will be difficult. I humbly suggest, however, that China represents a slightly different new group of developing country in this light. For one thing, China s extremely rapid development makes it a kind of hybrid; a largely economical and infrastructural developed nations with its undeveloped and poor past fresh in mind. For another, the unique path to growth and development chosen by central authorities has created a dual society one of affluence and a flurry of business activity in the eastern coastal regions and western land-locked regions of continued poverty, primary industry interspersed with some low-tech production. This means that it has both the cheap, low- and medium- skilled labour and sympathy for developing countries on the one side, and the infrastructure, money and know-how on the other to make deals on a large scale with its developing comrades. Peter Mellbye does grant that there may be something to this. Eunice Tai of Norway s oil company Statoil, ensures us that Norwegian aid or investment would never be completely politically neutral. However, she also cautions against seeing Chinese money as free money while the strings may not political, there will always be certain conditions involved. In fact, in April 2012, Ghana began receiving a three billion USD loan from the CDB - the biggest loan in the country s history representing 8 percent of its 2011 GDP. In comparison, the World Bank lent 2,2 billion USD to the whole of sub-saharan Africa in However, the loan contract stipulates that 60 percent of the amount must be used to implement projects for Chinese contractors 14. There is a long list of projects provided for by the loan and Chinese companies are heavily involved. Furthermore, the agreement obliges GNPC to sell 13,000 barrels of oil a day to Unipec Asia, a subsidiary of SINOPEC, for 15,5 years even longer than the term of the loan. CDB thus ensures that it gets paid (Sanderson & Forsythe, 2013). The fact that Chinese companies thus benefit highly from the loans and investments they make abroad follows the much-used official cliché of a win-win strategy. If the African countries develop and benefit from infrastructural investments and funds while Chinese companies take home some profit, the deals are mutually exclusive, 14 Keep in mind, however, than Chinese companies often have 25 to 40 percent cost reduction over non-chinese contractors when they bid for bids anyway (Sanderson & Forsythe, 2013) 66

78 regardless of international complaints that locals go unemployed while Chinese workers march in 15. Win-win also occurs on larger scales when payments for the oil sold to China in oil-for-loans deals for example, often occurs in CNY, so that the African nations have an extra incentive to use the cash on manufactured goods from China, in addition to their relative low cost. Thus, both partners in a sense win twice. Offering limited access to domestic markets in exchange for resources is particularly effective for China considering the vast prospect for both demand and supply of manufactured goods in China s enormous and increasingly prosperous population. A famous quote is that China needs Africa and Africa needs China. Whether or not one can call funds from China freer than those from other investors, loaners or donors, African agents seem to have further reason to prefer Chinese partners over others. This has to do with the awe and respect China has so rightly earned in its recent past of extreme economic growth and development. China s unique development history places China in a unique position to understand the needs of the African nations; as a developing country with attributes benefitting a major power. As Eunice Tai puts it, China has its own long successful experience to draw from and is sympathetic to developing countries as it is still undergoing transformation itself. Thus, the receivers of both funds and advice do not feel patronized by nations that have long forgotten the difficulties of massive social, economic and political change, but rather feel spoken to as equals by someone only slightly ahead on the route to affluence. The ability of the Chinese central government to remain so strong through this process and achieve growth and development without full democratization a strategy so long and firmly insisted on by most Western banks and companies - is also likely to be an attractive prospect for many African governments. Especially so after the evidence from the recent global financial crisis that the Western model may not be as infallible as previously stated. Heidi Haugen who has studied Sino-African business relations, however, believes that commercial incentives rather than cultural are at the root of larger deals. An example of how Chinese growth models are looked up to and sometimes replicated in Africa is the setting up of special economic zones that did so clearly benefit China in the development of its industry and to attract FDI. Such zones are in 15 The NOCs have hired some non-chinese employees to facilitate cross-cultural awareness recently 67

79 fact among six recommendations for developing countries as China s influence becomes a leading dragon, and China has so far set up zones in Nigeria, Mauritius, Egypt, Algeria, Zambia and Ethiopia (Sanderson & Forsythe, 2013). Funds from the CDB is the leading source of capital. Resistance has been met, however, especially in the inability of the African governments to make decisions and act as quickly as the Chinese companies are used to. Workers and low-level managers may often be locals, such as in the Lekki Free Trade Zone in Nigeria, but high-level managers are Chinese, limiting the technology and skills transfer to the locals. The idea of China leading the way for developing countries is greatly tied to the CDB and the way in which it enabled China to grow and develop at such astonishing rates. The bank practically wrote the manual for the biggest economic and urbanization boom in history, pioneering its system of lending to local state-backed companies that funneled over two trillion USD across the country to develop its roads, bridges, subways, stadiums and other infrastructure. The long-term funds necessary for these investments were in many cases made by the CDB selling land, and this model would later be used to finance oil sales in Latin America and Africa. Later the bank has enabled China s global expansion, again by using its large state-owned clients that achieve great profits as a result (Sanderson & Forsythe, 2013). Another comparative advantage of China s that many of the interviewees commented on, is the human factor. As already mentioned, China s entry into African oil markets has been characterized not only by capital; but by people. First of all there is the ethnic factor Heidi Haugen believes much evidence can be found for prejudices both ways, both positive and negative, but that when it comes down to it, business is business. On the larger scale, speculations have been made that Asian partners may be preferable due to the marred history between certain former colonies in Africa and their colonial power. One of my advisors at DNV, himself French, is quick to point out this possibility in the case of the French colonies of for example Egypt, Algeria, Cote d Ivoire, Guinea, Nigeria and Libya. On the other hand, media has often criticized China as being the new colonialist power in Africa, and may perhaps be perceived as such and thus less preferred by some African agents. Heidi Haugen points out, on the other hand, that many former colonies have good ties with their colonials. 68

80 The human factor also comes into the picture when it comes to Chinese migration into Africa and the use of Chinese workers by the NOCs abroad. This strategy is not pursued by most other oil companies. Hugo Harstad of Statoil remarks that his company takes pride in including local labour and building local competence abroad, and Peter Mellbye comments on the media criticism that locals clearly go unemployed while Chinese workers take over new potential jobs. Bjørn Slettvåg of the Norwegian Central Bank suggests that labour costs may be a factor in this decision costs of experienced and high-skill labour, that is, and Peter Mellbye agrees that particularly Chinese workers are of such numbers and varying skills that they are capable of taking over the whole spectrum of jobs connected to oil activities. Labour costs in China are admittedly rising, however, and African labour becoming more skilled. Chinese migrants also complain of labour laws sometimes being tougher than in China paying overtime wages for less work to African employees and having African law favour the employee instead of the employer as is the case in China (Sanderson & Forsythe, 2013). Especially in partnerships with European companies, Heidi Haugen notes that Chinese labourers would be much cheaper than their European counterparts. Jakub Walenkiewicz of DNV adds that as China has such a large supply of medium-skilled labour tired for waiting for equality and incomeopportunities at home, perhaps are very willing to move to Africa to get the change for a new life in the new land of plenty. Another reason why Chinese NOCs send more of their own labourers to Africa than other companies may also be, as Peter Mellbye suggests, that Chinese labourers can handle varying and unstable living conditions to higher degrees than many from developed countries. Heidi Haugen with her extensive fieldwork background among Chinese migrants in Africa agrees that the labourers seems willing to accept different living standards, but emphasizes that it is important to distinguish between farmer migrants and for example engineers. They do not receive insignificant wages in Africa as some might think, she ensures us, especially if their particular type of competence is in low supply. There is considerably opportunity for social and economic mobility in the migration choice. Sometimes larger corporations must compete for the migrants. Unfortunately there is no clear overview of what types of workers are sent to Africa or from which regions they originate. Haugen adds the surprising and interesting finding that it is often women, not men, of large Chinese corporations that 69

81 are willing to relocate. She suggests this may stem from the difficulty of women in China to reach certain height in their careers compared to their male colleagues, and that a period abroad will greatly enhance salary, experience and position. This then becomes an international period in their overall life plan, in which they often leave their children and families at home - or postpone family life till later. Western women are less likely to make this choice, which means that the standard of living and security arrangements they would require to relocate their whole families to Africa would be significantly higher than what the Chinese women accept. Thus, one often find Chinese women in high positions in Africa. China does as we have seen, however, also have some disadvantages to doing business in Africa. We claim, however, that they are increasingly finding ways to overcome these. As seen in the empirical evidence section, international oil companies teaming up with Chinese companies is an increasingly common sight, and especially when it comes to less stable parts of the world such as many African countries, allowing China to work towards energy security while reducing the risk of problems with host governments and populations wary of overly large Chinese presence in their sensitive industries. Spokesman for Petro China, Mao Zefeng, was quoted saying that not only direct deals can go smoother with a partner, but also the mergers and acquisitions themselves. The other companies then sees the M&A action as a business deal, not as political behavior on China s side a resource grabbing by a state-owned entity (Oster, 2010). The IOCs often have much more experience in developing countries in soothing local concerns, for example over revenues going overseas, the environment or human rights. In our study of external driving forces of the Chinese NOCs we have been able to explain the fascination with African oil in particular compared to that of other regions. It is plentiful and new, further discoveries are being made and it is of high quality. Chinese NOCs have advantages in their dealing with regional risks and African business culture that explain not only why they choose African involvement more than other IOCs and NOCs, but also why they so often succeed. Reserves-toproduction ratios nonetheless showed that the Middle East will always be a major oil source for Chinese NOCs. Transportation costs have explained why crude is easier and cheaper to ship, explaining why exports and imports of crude oil is much more 70

82 common than that of refined oil globally. The same theory of cost minimization must also conclude that oil from Central Asia, Russia and larger Asian economies will likely be prioritized when geographical closeness and cheap transport is a priority, and risk minimization and portfolio diversification explains not only why China has been looking towards Africa as regional security and supply risks have increased in the Middle East, but also why Chinese NOCs will always spread their supply sources across all the major regions to ensure supply security. 71

83 5. Conclusion and Policy Implications This thesis has studied the decision-making process of Chinese National Oil Companies by first establishing some empirical findings about their relations within African oil markets, then attempting to explain the observed actions through internal and external driving forces influencing the NOCs. Our main findings were that China imports vast amounts of oil from abroad as its reserves-to-production ratio is decreasing and consumption far exceeding production potential as the economy grows. We also found that Chinese oil imports are increasingly coming in from Africa as opposed to from Russia, Central Asia or South and Central America, though recent finds in Venezuela may change the latter situation slightly. Characteristics of African oil supply and quality are the main driving forces explaining this. The Middle Eastern region is the only one exceeding the percentage of imports coming from Africa and this is unlikely to change in the light of its high reserves and production. Risk minimization nevertheless supports a movement away from complete reliance on only Middle Eastern oil. Further, we have found that studying bilateral oil relations is not as simple as looking to direct trade data, as Chinese NOCs involvement in African oil increasingly takes the form of investments in upstream and downstream processes and equity oil instead of operating production centers alone. Teaming up with partners both of African and international background is an increasing trend explained both by risk management and characteristics of the Chinese NOCs that are due to factors internal to Chinese oil market structures and the distinctiveness of Chinese oil. Finally we have found that it is crude oil, not refined petroleum products, in which Chinese NOCs, as well as most international oil companies, trade. Transport costs explain this as well as energy security concerns about keeping as much as possible of the oil production process within domestic borders and control. Thus, a combination of longterm energy security, short- and long-term commercial interests and adaptation to changing domestic and international market structures has given the results we have observed empirically about Chinese overseas oil activities in Africa. In the interplay between internal and external forces we have seen that Chinese energy policy can have significant impacts on the global level, both from the supply and demand sides of oil markets. Studying drivers of Chinese oil demand through transportation, industry, manufacturing and household consumption trends is therefore highly informative of global demand trends as China is such a large part of global 72

84 demand. A study of the political and commercial driving forces behind Chinese NOCs decision-making processes helps foresee future developments in their investment and business structure changes. However, due to the unique duality of Chinese NOCs as both state-owned and stock registered, partly government-run and partly independent entities, much of their further actions must still be left for the future to reveal. We hope through that we have through this thesis given an overview both of the developing trends in Sino-African oil relations and the driving forces behind them from the perspectives of the Chinese NOCs that contributes to existing literature on the topic. Specifically through the many interviews we have pursued with a varied array of experts on the field, we hope the perspectives and first-hand accounts portrayed here may complement what is already written in academic journals and Chinese domestic press releases in this rather sensitive and ever evolving sector. Food for further thought that has emerged from study includes the question of whether the success of Chinese NOCs in African oil markets along with a healthy diversification through other source regions can be reproduced by other national and international entities. Is China creating a new type of south-south relationship only possible because of its unique position as a developing-developed country with a strong government and deep pockets? It is also interesting to consider how sustainable the method of involvement is as African nations increasingly discover and utilize the value of their resources. Domestic NOCs in West Africa are increasingly carrying out their own exploration activities, and generally leading in terms of shares in their own blocks. Production is as of yet dominated by international oil corporations, but this may change as domestic NOCs learn and grow. Both Angola s Sonangol and Libya s Libya National Oil Corporation have recently blocked acquisitions of block interests by Chinese NOCs and exercised their own rights to purchase shares instead. A discussion of the potential benefits to the general population of the oil-rich African countries should also evolve naturally from a study such as this, as we see the amounts of funds coming in for oil-related investments, infrastructure and aid along with foreign workers and international attention. Many claim that China is the reason for the new-found optimism that can be observed in Africa, and this power should not be underrated. However, too high a dependence on only the oil sector, and only on demand from the recently cooling Chinese economy will not be a wise decision for these presently very mono-cultural economies. 73

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91 Appendix A1. LIST OF INTERVIEWEES CNPC - Guo Jian, INTSOK China Representative (Norwegian oil and gas partners), DNV Beijing, formerly of CNPC. Telephone interview , Shanghai - Beijing DNV Headquarters, Høvik, Norway - Jakub Walenkiewicz, Head of Market Intelligence. Interview in person , DNV Oslo - Viktor Sinding-Larsen, Market Analyst of Energy Markets. Interview in person , DNV Oslo - Richard Tao, Discipline Leader; Technical Operations. Interview in person , DNV Oslo DNV Nigeria - Ben-Goru Ofeke, Senior Surveyor. correspondence January 2013, Shanghai-Nigeria Norwegian Central Bank, Monetary Policy; International Dept Statoil - Bjørnar Slettevåg, Market Analyst; Asia. Interview in person , Central Bank, Oslo. - Hugo Harstad, Vice President; Development and Production International, South America and Sub-Saharan Africa. Interview in person , Statoil HQ, Oslo - Peter Mellbye, recently retired after 30 years in Statoil (Director of International Operations), previously Norwegian Ministry of Trade and Norwegian Export Council. Interview in person , Wilhelmsen Bygget, Oslo - Eunice Tai, Statoil Business Development, works on Tanzania projects, seven years experience in finance in Hong Kong and Singapore within oil and gas M&A. Telephone interview , Shanghai - Oslo Subject-matter professional, Beijing - Private Skype conversation Shanghai-Beijing. University of Birmingham, School of Government and Society 80

92 - Jonna Nyman, PhD Candidate; (Re)conceptualizing energy security in US-China relations. correspondence January 2013, Shanghai- Birmingham University of Oslo, Dept of Sociology and Human Geography - Heidi Haugen, PostDoc within Production, trade and consumption in South-South commodity flows: Re-theorizing from below. Skypeinterview Shanghai - Oslo A2. Introduction to Det Norske Veritas, DNV The Norwegian Veritas, ( 挪威船级社的 ), hereafter DNV, was established in Norway in 1864 and is an independent foundation working to safeguard life, property and the environment. Now boasting an impressive 300 offices in 100 different countries with an excess of 8000 employees worldwide, DNV has become a global provider of services for managing risk (DNV, 2012). Target industries for the company s services include the aviation industry, the food and beverage industry where it provides certification according to industry standards, and the area of healthcare where it cooperates with national authorities and providers across the world. In addition to IT and telecom, rail and petrochemical, DNV provides world-class expertise within technology, operations, management and risk in the energy, oil and gas industries. This paper will be tied to these, along with the main industry in which DNV has established itself as one of the world s leading classification societies: the maritime industry. DNV assists customers in the maritime industry in managing risks in all phases of a ship s life, using its decades of experience in pioneering development of harsh environment oil fields offshore of Norway and globally. There is ship classification, fuel testing and management, technical business risk, maritime environmental risks, competency-related services and a range of rules and standards requirements that need to be addressed. DNV has developed rules and standards for ships for over 140 years, along with those for the offshore industry, especially within the development of oil and gas fields, production and transportation. This brings us further toward the main focus of this paper, which is the transport of oil by ship. DNV took a large leap in its expertise on testing and certification in the energy and renewable sector when it bought the Dutch company Kema in March of 2012, adding 81

93 3000 employees to its ranks in the process. The new larger company was subsequently divided into three areas of business; DNV Maritime and Oil and gas, which would be located in the traditional headquarters in Høvik, Oslo along with the management, VNV Kema Energy and Sustainability with head offices in Arnhem, Netherlands, and finally DNV Business Assurance based in Milan, Italy (Almeida, 2012) (Stensvold, 2012) (Stensvold, 2012). During my work with this thesis, a furhter big change occurred within DNV, which announced on the morning of the 20 th of December 2012 that it would after decades of interest and negotiations merge with the maritime classification giant Germanischer Lloyd. The national and international media coverage of this decision showed the importance of the two companies, who will now if all goes well combine to form the largest classification society in the world, responsible for classing 265 million gross tons of ships and rigs worldwide (Almeida, 2012). The Hamburg-based company seems a good choice for DNV as it too was established as early as the late 19 th century (1867) with similar goals of safeguarding life, property and the environment in maritime shipping (Stensvold, 2012). It too later expanded its operations recently gaining vast new knowledge in the offshore, oil and gas and renewable energy sectors through a series of acquisitions between 2004 and and furthered its missions into other sectors making it a leading classification company with a strong position in the maritime sector. In particular, it is an expert in the containership sector, something DNV cannot boast, but is glad to bring under their belt through the new company which will be called the DNV GL Group. However, we are unlikely to see any real-market effects of the merger for a while yet, as the approval needed from several involved national competition authorities for the merger to finalize may take up to six months. The new company is then planned to be registered as a Norwegian Limited Company (AS) with headquarters and main maritime activity still located in Høvik, Norway. DNV will own 63,5 percent and GL s owner Mayfair will own 36,5 percent of the new company s stocks. After the acquisition, the new massive company would again be slightly rearranged as regards it business areas, now comprising the four segments of Energy and Renewables based in Arnehim, Netherlands; Business Assurance still in Milan, Italy, while the old segment of Maritime, Oil and gas would be separated in Maritime with offices in Hamburg, Germany, with only Oil and Gas and management remaining in 82

94 Høvik, Oslo, Norway. Despite the move of the Maritime division to Germany, DNV is adamant that its maritime academic community shall remain strong as large parts of the activities still will occur in or through Oslo. DNV was first represented in China already in 1888 as Norwegian ship owners with renowned navigations skills developed in the North Sea brought sailing ships and steamships to contribute to the coastal traffic of China. DNV Region Greater China had developed a large presence in the country far in advance of the WTO accession and the general opening up of its markets (DetNorskeVeritas, 2008). DNV s experiences in modern China began in 1974 when cooperation began with the Chinese Registry of Shipping (forerunner of the China Classification Society). They now have a joint classification scheme for vessels built in Chinese yards and cooperation in the offshore sector soon followed. China s largest and world-leading group specializing in global shipping, modern logistics and ship building; COSCO (China Ocean Shipping (Group) Company), has a lot of corporation with Norway through DNV, and DNV hopes to bring the long Norwegian experience within the field to its Chinese partners with a Chinese mode variation. DNV has been involved in the Chinese energy market since 1980s with its agreement with China s leading oil company China National Offshore Oil Corporation (CNOOC), and with ConocoPhillips for its first offshore field in the South China Sea. Later the customer base has extended to China National Petroleum Corporation (CNPC), China Petroleum & Chemical Corporation (SINOPEC) and Shell China among others. It was provided certification and assessment services for Huawei since 1996, Tsingtao Beer since 1995, Shanghai GM since 2000, the Haier Group wince 2006 and Baosteel. Now DNV has offices in Shanghai, Beijing, Dalian, Qingdao, Wuhan and many other locations in China with about 800 employees. The Chinese market accounts for more than 10 per cent of DNV worldwide revenue and is growing rapidly. In 1996, China s president Jiang Zemin himself visited DNV s head office in Norway along with the King of Norway. DNV s ability to have such an important impact in China and globally while being such a relatively small company has a lot to do with its longstanding and positive relations with the governments of the countries it enters. DNV signed an agreement in 2007 with the State-owned Asset Supervision and 83

95 Administration Commission (SASAC) on assessing risks in Chinese enterprises and with the National Development Reform Commission Energy Research Institute the year before. A3. Additional tables and figures Figure 19. Map of Africa Source: (GraphicMaps, 2012) 84