Meanwhile, the NOCs have been investing heavily in expanding their refinery capacity away from a dependence on light sweet crude, the mainstay of domestic production, so as to take advantage of a wider range of resource investments around the globe.
However, Erica Downs still sees no evidence of a national energy security programme in development – despite what the companies say in public when their profits are being squeezed by retail price controls.
She warns: “It’s very opaque. Not all that much oil is going back to China. I think a lot of it is sold on the international market. It’s in the companies’ interests to let the government think their production is enhancing national energy security. That would be one of the arguments I would make to the government for lifting price caps: if my company is haemorrhaging money, how am I going to have enough cash to invest for national energy security?”
She estimates that China’s oil imports will increase from about 3million barrels per day in 2005 to 6-11million in 2020, accounting for 60-80% of national consumption.
Macquarie’s David Johnson describes the overseas investment as a “quasi strategic reserve”.
“They’re not just keeping that oil in the ground, but producing it and selling it, but if something happens … they take the attitude that they will acquire oil wherever it is available.”
In the first eight months of this year, domestic oil production hit 126.43million tons, a rise of just 2.1% over the same period of 2007.
“The key is buying oil assets in order to boost reserves and production. China itself is a very mature area so it’s not going to see a rapid rise. You’ve got to run fairly hard to stand still, so if you want to grow you have to go abroad.”
In fact, only half of the 620,000bpd produced by Chinese companies abroad last year was shipped back to China, accounting for less than 10% of the country’s 3.25million barrels imported each day, say Trevor Houser and Roy Levy, of New York economic researchers Rhodium Group, in a paper published in August.
“And the oil that was sold to the domestic Chinese market was sold at prevailing international prices, leaving Chinese consumers with neither meaningful energy security nor a buffer against rising oil prices.”
It’s that lack of discernible public benefit that has prompted a debate in Beijing over the NOCs’ developments abroad, a discussion tempered by a complex dilemma caused by central economic planning.
In the spring of 2006, the NOCs, facing huge losses and inadequate state subsidies, turned the taps down low to pressure the government into raising the price caps.
Pictures of long queues at service stations and impoverished farmers unable to run their tractors soon filled the news media. Caught between rising rural discontent and an urban middle class increasingly attached to their cars on the one hand and the NOCs needing to fund huge payrolls (Sinopec and CNPC together are believed to employ more than two million people) on the other, the government reluctantly agreed to a 15% price increase.
Over the next two years, as the international crude price drove relentlessly up towards $150 a barrel, the NOCs found their upstream operations increasingly beneficial in offsetting downstream losses. Houser and Levy estimate CNPC could have made profits of $1billion a year from its Sudan operations alone had prices stayed at $140 a barrel.
Lacking offshore drilling capacity and stung by the American rebuff of CNOOC’s bid for Unocal in 2005, the NOCs ventured into territories such as Iran, which had been spurned by the IOCs for security or political reasons.
However, 16 Chinese oil workers in Nigeria were kidnapped early last year, and in April, at least nine Chinese staff were killed and another six were taken hostage in an attack on a Sinopec oilfield in Ethiopia. Meanwhile, Darfur activists were mounting a long campaign against Beijing’s “Genocide Olympics” and China’s involvement in Sudan’s oil industry.
All of which has led to discomfort in China’s political elite, who saw years of “soft diplomacy” being squandered in the energy scramble, say Houser and Levy.
“In Beijing, there is now an active debate about whether overseas investment by Chinese oil companies will ever be a successful means of securing the country’s energy supply, and whether it is a worthwhile strategy given the cost in terms of China’s image and reputation.”
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