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NOC NOC; Who’s there?

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Hydrocarbon Engineering,

China’s NOCs enjoy several benefits not available to many oil companies, but have they come too late to the energy party to make full use of them? Thomas Sheltra investigates.

China’s NOCs have enjoyed several benefits in their quest to enhance the nation’s energy security goals through the acquisition of oil companies around the world. However, in acquiring oil rights in politically volatile regions, and in a failed attempt at acquiring Unocal, China’s NOCs appear to suffer from coming late to the energy party. This article argues that China’s NOCs, while having seemingly endless pockets, pay an extreme premium for oil rights, and the quality and quantity of the oil secured does little to enhance China’s endless thirst for oil.

If I were writing this piece four years ago, my analysis of Chinese NOCs would have been that they had just suffered an embarrassing failure in acquiring the rights to the American oil company Unocal, their biggest purchase to date has been a US$ 4.2 billion dollar deal in which CNPC gave up two-thirds ownership for the deal to go through, and thus far Chinese NOCs have only made acquisitions in areas of the world that are politically volatile, and where western IOCs have shied away from, for fear of seeing more of their employees die than oil be produced. For all of the advantages that Chinese NOCs have compared to IOCs (such as: endless capital streams from Chinese banks, government support for all of Sinopec, CNOOC and CNPC’s energy quest to find and secure oil for Chinese demand and a profit motive that serves only to make Chinese officials happy and not shareholders), until 2009 they had done nothing but purchase oil from anyone who would not mind the backlash of the Chinese purchasing oil from them.

The Unocal failure had less to do with China’s NOCs being less competitive compared to IOCs than it did with the stigma of a Chinese oil company, or as most saw it, as the Chinese government owning an American company. Lest we forget that in America we have Lukoil, which is Russian, or Citgo, whose parent company is from Venezuela all over the USA. Despite a black eye, Chinese NOCs have bounced back with two of their biggest purchases, one Addax, a Swiss company for US$ 7.2 billion, and its most recent, a US$ 15 billion purchase of the Canadian company Nexen. To be sure, there has been plenty of backlash of the similar social stigma of having ‘China’ purchase oil companies in Switzerland and Canada, even though the rights of ownership to these companies have little to do with them being Swiss or Canadian, and everything to do with the exploration and development opportunities in the Gulf of Mexico and the Middle East.

So why am I still knocking NOCs? It has less to do with their tactics, and more to do with the development acquisitions, price tag and the downstream results of price at the pump. From 2005 to 2013 the three major NOCs (Sinopec, CNOOC, and CNPC) have made 25 purchases at a cost of US$ 138 billion dollars. After the successful acquisitions of Addax and Nexen, China’s NOCs have no desire to take the foot off the gas pedal, and in the future will increase its footprint in the West, especially in Canada. Yet, as a result of the success of NOCs, the Chinese government is finding itself in a difficult situation in balancing the success of the NOCs with the continued exploration for oil, and trying to secure adequate supply for the country.

As I argued in my last piece, ‘China’, or rather CNPC, has built two large, multi-billion dollar pipelines that do not produce enough oil and are environmental disasters waiting to happen. NOCs purchasing oil companies and oil fields will produce plenty of upstream exploration and development for growth of the companies’ profits, but little or none of the oil from these regions will ever make it to China, and will instead be purchased on the world oil market. This leaves a real bitter taste in the mouths of Chinese citizens who, while still paying a subsidised price at the pump, pay a premium. Chinese NOCs (like the government) are also playing a balancing act on the domestic side, by being allowed to profit in its acquisition of oil abroad, yet not being beholden to the responsibility of supplying their acquisitions to the Chinese citizens. This problem is especially apparent in this next two phases in the mid and downstream sectors.

China’s NOCs still suffer in developing adequate midstream and downstream infrastructure. This leaves the Chinese still suffering from adequate supply and leaves China susceptible to shortages as consumption increases. While the three major NOCs are only responsible for international investments, transportation and refinery capabilities, along with the subsidised gas prices continue to hurt China’s energy security.

This is not to say the public failure of CNOOC in 2005 has not taught NOCs an important and valuable lesson for the future. The public perception of a Chinese NOC will always come with the implication that you are dealing with the Chinese government. Yet, based on the recent success, China’s NOCs have yet to find a reason not to continue in acquiring more companies for exploration and development. The greatest opportunity for development by NOCs abroad has been in Canada and in the US. Recently, NOCs have spent nearly 90% of their investment money in North America, the majority of it in Canada. As the United States continues to find new upstream opportunities, further acquisitions and partnerships with Chinese NOCs are becoming a real possibility. The real question is whether the recent success with Addax and Nexen will create enough goodwill to overcome the social stigmas that come with having a Chinese NOC own an American company.

Thomas Sheltra's previous article can be reached here.

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Adapted by David Bizley

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